NOTE 9: Accounting for Share-Based Payments

Overview of Share-Based Payment Plans

The Company has a number of active and inactive equity incentive plans (the Incentive Plans) under which the Company has been authorized to grant share-based awards to key employees and non-employee directors. The Company also has an employee stock purchase plan (the ESPP) that allows employees to purchase Company shares at a discount through payroll deductions. All of these plans contain a nondiscretionary anti-dilution provision that is designed to equalize the value of an award as a result of any stock dividend, stock split, recapitalization, or any other similar equity restructuring.

A total of 199.0 million shares have been previously authorized for grant to key employees and non-employee directors under all of the Company’s Incentive Plans, but only 80.0 million of those shares were authorized for grants of share-based awards under the Company’s currently active Incentive Plans. In addition, a total of 70.0 million shares have been previously authorized for purchases by employees participating in the ESPP.

At February 2, 2018, there were 33.5 million shares remaining available for grants under the currently active Incentive Plans and 21.9 million shares remaining available for purchases under the ESPP.

The Company recognized share-based payment expense within SG&A expense in the consolidated statements of earnings of $99 million, $90 million, and $117 million in 2017, 2016 and 2015 respectively. The total associated income tax benefit recognized was $31 million, $29 million and $38 million in 2017, 2016 and 2015, respectively.

Total unrecognized share-based payment expense for all share-based payment plans was $118 million at February 2, 2018, of which $69 million will be recognized in 2018, $43 million in 2019 and $6 million thereafter. This results in these amounts being recognized over a weighted-average period of 1.7 years.

For all share-based payment awards, the expense recognized has been adjusted for estimated forfeitures where the requisite service is not expected to be provided. Estimated forfeiture rates are developed based on the Company’s analysis of historical forfeiture data for homogeneous employee groups.

General terms and methods of valuation for the Company’s share-based awards are as follows:

Stock Options

Stock options have terms of seven or 10 years, with one-third of each grant vesting each year for three years, and are assigned an exercise price equal to the closing market price of a share of the Company’s common stock on the date of grant. Options are expensed on a straight-line basis over the grant vesting period, which is considered to be the requisite service period.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. When determining expected volatility, the Company considers the historical volatility of the Company’s stock price, as well as implied volatility. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant, based on the options’ expected term. The expected term of the options is based on the Company’s evaluation of option holders’ exercise patterns and represents the period of time that options are expected to remain unexercised. The Company uses historical data to estimate the timing and amount of forfeitures. The weighted average assumptions used in the Black-Scholes option-pricing model and weighted-average grant date fair value for options granted in 2017, 2016, and 2015 are as follows:



	2017			2016			2015
Weighted-average assumptions used:
Expected volatility	23.6		%	24.0		%	31.3		%
Dividend yield	1.68		%	1.66		%	1.69		%
Risk-free interest rate	2.14		%	1.42		%	1.99		%
Expected term, in years	6.43			6.44			7.00

Weighted-average grant date fair value	$	18.30		$	15.00		$	20.27

The total intrinsic value of options exercised, representing the difference between the exercise price and the market price on the date of exercise, was approximately $77 million, $73 million and $68 million in 2017, 2016 and 2015, respectively.

Transactions related to stock options for the year ended February 2, 2018 are summarized as follows:



	Shares (In thousands)		Weighted-Average Exercise Price Per Share		Weighted-Average Remaining Term (In years)	Aggregate Intrinsic Value (In thousands)
Outstanding at February 3, 2017	4,239		$	49.84
Granted	394		82.44
Canceled, forfeited or expired	(131	)	67.55
Exercised	(1,687	)	37.72
Outstanding at February 2, 2018	2,815		$	60.84	7.14	$	114,479
Vested and expected to vest at February 2, 2018 ¹	2,764		$	60.54	7.10	$	113,200
Exercisable at February 2, 2018	1,784		$	52.55	6.29	$	87,318


¹	Includes outstanding vested options as well as outstanding nonvested options after a forfeiture rate is applied.

Restricted Stock Awards

Restricted stock awards are valued at the market price of a share of the Company’s common stock on the date of grant. In general, these awards vest at the end of a three-year period from the date of grant and are expensed on a straight-line basis over that period, which is considered to be the requisite service period. The Company uses historical data to estimate the timing and amount of forfeitures. The weighted-average grant-date fair value per share of restricted stock awards granted was $82.41, $71.35 and $69.44 in 2017, 2016, and 2015, respectively. The total fair value of restricted stock awards vesting was approximately $71 million, $151 million and $144 million in 2017, 2016 and 2015, respectively.

Transactions related to restricted stock awards for the year ended February 2, 2018 are summarized as follows:



	Shares (In thousands)		Weighted-Average Grant-Date Fair Value Per Share
Nonvested at February 3, 2017	2,681		$	64.22
Granted	473		82.41
Vested	(910	)	53.87
Canceled or forfeited	(348	)	67.03
Nonvested at February 2, 2018	1,896		$	73.21

Deferred Stock Units

Deferred stock units are valued at the market price of a share of the Company’s common stock on the date of grant. For non-employee Directors, these awards vest immediately and are expensed on the grant date. During 2017, 2016 and 2015, each non-employee Director was awarded a number of deferred stock units determined by dividing the annual award amount by the fair market value of a share of the Company’s common stock on the award date and rounding up to the next 100 units. The annual award amount used to determine the number of deferred stock units granted to each Director was $175,000 for 2017, and $150,000 for 2016 and 2015. During 2017, 22,000 deferred stock units were granted and immediately vested for non-employee Directors. The weighted-average grant-date fair value per share of deferred stock units granted was $80.22, $80.35 and $69.98 in 2017, 2016 and 2015, respectively. The total fair value of deferred stock units vested was $1.8 million in 2017, and $1.5 million in 2016 and 2015. During 2017, no fully vested deferred stock units were released as a result of termination of service. At February 2, 2018, there were 0.4 million deferred stock units outstanding, all of which were vested.

Performance Share Units

The Company issues performance share units classified as equity awards. Expense is recognized on a straight-line basis over the requisite service period, based on the probability of achieving the performance condition, with changes in expectations recognized as an adjustment to earnings in the period of the change. Compensation cost is not recognized for performance share units that do not vest because service or performance conditions are not satisfied and any previously recognized compensation cost is reversed. Performance share units do not have dividend rights. The Company uses historical data to estimate the timing and amount of forfeitures.

The Company’s performance share units are classified as equity and contain performance and service conditions that must be satisfied for an employee to earn the right to benefit from the award. The performance condition is primarily based on the achievement of the Company’s target return on non-cash average assets (RONCAA). These awards are valued at the market price of a share of the Company’s common stock on the date of grant less the present value of dividends expected during the requisite service period.

In fiscal 2016, the Company began issuing performance share units that contain a market condition modifier, in addition to having a performance and service condition. The performance condition for these awards continues to be based primarily on the achievement of the Company’s RONCAA targets. The market condition is based on the Company’s total shareholder return (TSR) compared to the median TSR of companies listed in the S&P 500 Index over a three year performance period. The Company used a Monte-Carlo simulation to determine the grant date fair value for these awards, which takes into consideration the possible outcomes pertaining to the TSR market condition. The weighted-average assumptions used in the Monte Carlo simulations for these awards granted in 2017 and 2016 are as follows:



	2017		2016
Weighted-average assumptions used:
Expected volatility	20.8	%	21.4	%
Dividend yield	1.62	%	1.53	%
Risk-free interest rate	1.46	%	0.88	%
Expected term, in years	2.83		2.82

In general, 0% to 200% of the Company’s performance share units vest at the end of a three year service period from the date of grant based upon achievement of the performance condition, or a combination of the performance and market conditions, specified in the performance share unit agreement.

The weighted-average grant-date fair value per unit of performance share units classified as equity awards granted was $91.50, $77.58 and $71.52 in 2017, 2016 and 2015, respectively. The total fair value of performance share units vesting was approximately $31 million, $24 million, and $25 million in 2017, 2016, and 2015, respectively.

Transactions related to performance share units classified as equity awards for the year ended February 2, 2018 are summarized as follows:



	Units (In thousands)¹		Weighted-Average Grant-Date Fair Value Per Unit
Nonvested at February 3, 2017	723		$	65.30
Granted	273		91.50
Vested	(253	)	47.29
Canceled or forfeited	(45	)	77.42
Nonvested at February 2, 2018	698		$	81.31


¹	The number of units presented is based on achieving the targeted performance goals as defined in the performance share unit agreements. As of February 2, 2018, the maximum number of nonvested units that could vest under the provisions of the agreements was 1.3 million for the RONCAA awards.

Restricted Stock Units

Restricted stock units do not have dividend rights and are valued at the market price of a share of the Company’s common stock on the date of grant less the present value of dividends expected during the requisite service period. In general, these awards vest at the end of a three-year period from the date of grant and are expensed on a straight-line basis over that period, which is considered to be the requisite service period. The Company uses historical data to estimate the timing and amount of forfeitures. The weighted-average grant-date fair value per share of restricted stock units granted was $75.44, $67.26 and $66.24 in 2017, 2016 and 2015, respectively. The total fair value of restricted stock units vesting was approximately $5.6 million, $7.7 million, and $3.5 million in 2017, 2016 and 2015, respectively.

Transactions related to restricted stock units for the year ended February 2, 2018 are summarized as follows:



	Shares (In thousands)		Weighted-Average Grant-Date Fair Value Per Share
Nonvested at February 3, 2017	323		$	62.85
Granted	85		75.44
Vested	(72	)	50.42
Canceled or forfeited	(59	)	66.29
Nonvested at February 2, 2018	277		$	69.21

ESPP

The purchase price of the shares under the ESPP equals 85% of the closing price on the date of purchase. The Company’s share-based payment expense per share is equal to 15% of the closing price on the date of purchase. The ESPP is considered a liability award and is measured at fair value at each reporting date, and the share-based payment expense is recognized over the six-month offering period. The Company issued 1.1 million shares of common stock in 2017 and 1.3 million shares of common stock in 2016 and 2015 and recognized $13 million, $15 million, and $14 million of share-based payment expense pursuant to the plan in 2017, 2016, and 2015, respectively.