Employee Incentive, Retirement, Deferred Compensation, and Career Achievement Plans

Schwab’s share-based incentive plans provide for granting options and restricted stock units to employees, officers, and directors. In addition, we offer retirement and employee stock purchase plans to eligible employees and sponsor deferred compensation plans for eligible officers and non-employee directors.

A summary of share-based compensation expense and related income tax benefit is as follows:



Year Ended December 31,	2017			2016			2015
Stock option expense	$	50		$	45		$	46
Restricted stock unit expense	94			89			83
Employee stock purchase plan expense	9			7			6
Total share-based compensation expense	$	153		$	141		$	135
Income tax benefit on share-based compensation expense ⁽¹⁾	$	(57	)	$	(53	)	$	(51	)

⁽¹⁾ Excludes the 2017 income tax benefit of $87 million due to the adoption of ASU 2016-09, as disclosed in Note 2.

The Company issues shares for stock options and restricted stock units from treasury stock. At December 31, 2017, the Company was authorized to grant up to 44 million common shares under its existing stock incentive plans. Additionally, at December 31, 2017, the Company had 37 million shares reserved for future issuance under its employee stock purchase plan.

As of December 31, 2017, there was $268 million of total unrecognized compensation cost related to outstanding stock options and restricted stock units, which is expected to be recognized through 2021 with a remaining weighted-average service period of 1.9 years for stock options, 2.4 years for restricted stock units, and 0.3 years for performance stock units.

Stock Option Plan

Options are granted for the purchase of shares of common stock at an exercise price not less than market value on the date of grant, and expire ten years from the date of grant. Options generally vest annually over a one- to four-year period from the date of grant.

Stock option activity is summarized below:



	Number of Options (In millions)		Weighted- Average Exercise Price per Share		Weighted- Average Remaining Contractual Life (in years)	Aggregate Intrinsic Value
Outstanding at December 31, 2016	37		$	22.12	6.50	$	649
Granted	4		43.71
Exercised	(9	)	18.20
Forfeited	—		31.02
Expired	—		24.82
Outstanding at December 31, 2017	32		$	26.16	6.38	$	814
Vested and expected to vest at December 31, 2017	31		$	26.02	6.35	$	811
Vested and exercisable at December 31, 2017	20		$	20.82	5.02	$	612

The aggregate intrinsic value in the table above represents the difference between CSC’s closing stock price and the exercise price of each in-the-money option on the last trading day of the period presented.

Information on stock options granted and exercised is presented below:



Year Ended December 31,	2017		2016		2015
Weighted-average fair value of options granted per share	$	13.04	$	8.73	$	8.56
Cash received from options exercised	171		144		90
Tax benefit realized on options exercised	70		38		22
Aggregate intrinsic value of options exercised	241		149		90

We use an option pricing model to estimate the fair value of options granted. The model takes into account the contractual term of the stock option, expected volatility, dividend yield, and risk-free interest rate. Expected volatility is based on the implied volatility of publicly-traded options on CSC’s stock. Dividend yield is based on the average historical CSC dividend yield. The risk-free interest rate is based on the yield of a U.S. Treasury zero-coupon issue with a remaining term similar to the contractual term of the option. We use historical option exercise data, which includes employee termination data, to estimate the probability of future option exercises. The Black-Scholes model is used to solve for the expected life of options. The assumptions used to value the options granted during the years presented and their expected lives were as follows:



Year Ended December 31,	2017		2016		2015
Weighted-average expected dividend yield	1.06	%	1.22	%	1.22	%
Weighted-average expected volatility	34	%	30	%	28	%
Weighted-average risk-free interest rate	2.1	%	1.8	%	2.2	%
Expected life (in years)	4.1 - 5.3		4.7 - 7.3		4.7 - 7.5

Restricted Stock Units

Restricted stock units are awards that entitle the holder to receive shares of CSC’s common stock following a vesting period. Restricted stock units are restricted from transfer or sale and generally vest annually over a three- to five-year period, while performance-based restricted stock units also require the Company achieve certain financial or other measures prior to vesting. The fair value of restricted stock units is based on the market price of the Company’s stock on the date of grant. The grant date fair value is amortized to compensation expense on a straight-line basis over the requisite service period. The fair value of the restricted stock units that vested during each of the years 2017, 2016, and 2015 was $127 million, $105 million, and $126 million, respectively.

The Company’s restricted stock units activity is summarized below:



	Number of Units (In millions)		Weighted- Average Grant Date Fair Value per Unit
Outstanding at December 31, 2016	8		$	29.41
Granted	2		44.23
Vested	(3	)	28.15
Forfeited	—		30.86
Outstanding at December 31, 2017	7		$	35.16

Retirement Plan

Employees can participate in the Schwab’s qualified retirement plan, the SchwabPlan^® Retirement Savings and Investment Plan. The Company may match certain employee contributions or make additional contributions to this plan at its discretion. The Company’s total expense was $92 million, $83 million, and $78 million in 2017, 2016, and 2015, respectively.

Deferred Compensation Plans

Schwab’s deferred compensation plan for officers permits participants to defer the receipt of certain cash compensation. The deferred compensation plan for non-employee directors permits participants to defer receipt of all or a portion of their director fees and to receive either a grant of stock options, or upon ceasing to serve as a director, the number of shares of CSC’s common stock that would have resulted from investing the deferred fee amount into CSC’s common stock. The deferred compensation liability was $160 million and $135 million at December 31, 2017 and 2016, respectively.

FC Career Achievement Plan

The FC career achievement plan was implemented in January 2014 and is a noncontributory, unfunded, nonqualified plan for eligible FCs. An FC is eligible for earned cash payments after retirement contingent upon meeting certain performance levels, tenure, age and client transitioning requirements. Allocations to the plan are completed annually by the Company and are subject to general creditors of the Company. Based on the performance level achieved, an FC will receive an award calculated as a percentage of eligible compensation. Full vesting occurs when an FC reaches 60 years of age and has at least ten years of service with the Company. The Company is using the Society of Actuaries MP-2017 mortality improvement scale for its mortality assumptions.

The following table presents the changes in projected benefit obligation:



December 31,	2017		2016
Projected benefit obligation at beginning of year	$	26	$	17
Benefit cost	9		7
Actuarial (gain)/loss	9		2
Projected benefit obligation at end of year ⁽¹⁾	$	44	$	26

⁽¹⁾ This amount is recognized as a liability on the consolidated balance sheets and also depicts the accumulated benefit obligation.

The following table presents the net benefit cost and assumptions used to determine the net benefit cost:



December 31,	2017			2016			2015
Service cost	$	8		$	6		$	8
Interest cost	1			1			—
Net benefit cost	$	9		$	7		$	8

Assumptions used to determine net benefit cost:
Discount rate	3.71		%	4.62		%	4.19		%
Rate of compensation increase	3.00		%	3.00		%	3.00		%
Investment crediting rate for notional account balances	6.50		%	6.50		%	6.50		%

The following tables present the change in AOCI attributable to the components of the net cost and the change in benefit obligation and the amounts recognized in AOCI:



December 31,	2017			2016
Change in AOCI:
Beginning balance	$	1		$	—
Actuarial gain/(loss)	(11		)	1
Ending balance	$	(10	)	$	1



December 31,	2017			2016
Components in AOCI:
Net gain/(loss)	$	(10	)	$	1
Amount recognized in AOCI	$	(10	)	$	1
Tax effect	$	4		$	—
Net amount recognized in AOCI	$	(6	)	$	1