Stock-Based Compensation

12 Months Ended

Dec. 31, 2023

Share-Based Payment Arrangement [Abstract]

NOTE 20. Stock-Based Compensation

At the May 2021 Annual Meeting, the shareholders approved the Amended and Restated 3M Company 2016 Long-Term Incentive Plan (LTIP), which included an increase of 26,633,508 in the number of shares available for issuance. Awards may be issued in the form of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, other stock awards, and performance units and performance shares. As of December 31, 2023, the remaining shares available for grant under the LTIP Program are 27 million and there were approximately 8,600 participants with outstanding options, restricted stock, or restricted stock units.

The Company’s annual stock option and restricted stock unit grant is typically made in February to provide a strong and immediate link between the performance of individuals during the preceding year and the size of their annual stock compensation grants. The grant to eligible employees uses the closing stock price on the grant date. Accounting rules require recognition of expense under a non-substantive vesting period approach, requiring compensation expense recognition when an employee is eligible to retire. Employees are considered eligible to retire at age 55 and after having completed ten years of service. This retiree-eligible population represents 35 percent of the annual grant stock-based compensation expense; therefore, higher stock-based compensation expense is typically recognized in the first quarter. Due to the intended spin-off of the Health Care business (see Note 3), the 2024 annual grant will be made after the completion of the spin.

In addition to the annual grants, the Company makes other minor grants of stock options, restricted stock units and other stock-based grants. The Company issues cash settled restricted stock units and stock appreciation rights in certain countries. These grants do not result in the issuance of common stock and are considered immaterial by the Company.

Stock-Based Compensation Expense: Amounts recognized in the financial statements with respect to stock-based compensation programs, which include stock options, restricted stock, restricted stock units, performance shares and the General Employees’ Stock Purchase Plan (GESPP), are provided in the following table. Capitalized stock-based compensation amounts were not material.



(Millions)	2023		2022		2021
Cost of sales	$	44	$	48	$	47
Selling, general and administrative expenses	186		169		185
Research, development and related expenses	44		46		42
Stock-based compensation expenses	274		263		274
Income tax benefits	(45)		(62)		(100)
Stock-based compensation expenses (benefits), net of tax	$	229	$	201	$	174

Stock Option Program: The following table summarizes stock option activity:



(Options in thousands)	Number of Options	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (months)	Aggregate Intrinsic Value (millions)
Under option —
As of January 1, 2023	35,506	$	166.97
Granted	1,667	116.87
Exercised	(1,490)	101.54
Forfeited	(1,000)	166.62
As of December 31, 2023	34,683	167.38		51	$	—
Options exercisable
As of December 31, 2023	29,754	$	170.24	43	$	—

Stock options generally vest over a period from one to three years with the expiration date at ten years from date of grant. As of December 31, 2023, there was $26 million of compensation expense that has yet to be recognized related to non-vested stock option based awards. This expense is expected to be recognized over the remaining weighted-average vesting period of 18 months.

The following table summarizes additional information relative to stock options exercised during the respective years:


(in millions)	2023		2022		2021
Cash received from options exercised	$	147	$	205	$	457
Intrinsic value of options exercised	29		116		325
Tax benefit realized related to options exercised	6		24		69

For the primary annual stock option grant, the weighted average fair value at the date of grant was calculated using the Black-Scholes option-pricing model and the assumptions that follow.


	2023			2022			2021
Exercise price	$	116.90		$	162.41		$	175.04
Risk-free interest rate	3.8		%	1.9		%	0.8		%
Dividend yield	3.3		%	2.9		%	2.8		%
Expected volatility	22.8		%	21.8		%	22.6		%
Expected life (months)	84			83			83
Black-Scholes fair value	$	22.22		$	25.34		$	25.33

Expected volatility is a statistical measure of the amount by which a stock price is expected to fluctuate during a period. Expected volatility is based upon three volatilities of 3M stock: the median of the term of the expected life rolling volatility; the median of the most recent term of the expected life volatility; and the implied volatility on the grant date. The expected term assumption is based on the weighted average of historical grants.

Restricted Stock Units: The following table summarizes restricted stock unit activity:



(Units in thousands)	Number of Units	Weighted Average Grant Date Fair Value
Nonvested balance —
As of January 1, 2023	2,375	$	164.07
Granted	2,372	114.71
Vested	(705)	155.94
Forfeited	(244)	136.06
As of December 31, 2023	3,798	136.55

Restricted stock units granted generally vest three years following the grant date assuming continued employment. Dividend equivalents equal to the dividends payable on the same number of shares of 3M common stock accrue on these restricted stock units during the vesting period, although no dividend equivalents are paid on any of these restricted stock units that are forfeited prior to the vesting date. Dividends are paid out in cash at the vest date on restricted stock units. Since the rights to dividends are forfeitable, there is no impact on basic earnings per share calculations. Weighted average restricted stock unit shares outstanding are included in the computation of diluted earnings per share.

As of December 31, 2023, there was $158 million of compensation expense that has yet to be recognized related to non-vested restricted stock and restricted stock units. This expense is expected to be recognized over the remaining weighted-average vesting period of 23 months.

The following table summarizes additional information relative to restricted stock units for the respective years:


(in millions, except per-unit amounts)	2023		2022		2021
Weighted-average grant-date fair value of restricted stock units (per unit) that were granted	$	114.71	$	160.24	$	176.82
Intrinsic value of restricted stock units that vested	$	81	$	88	$	83
Tax benefit realized related to restricted stock units that vested	16		17		16

Performance Shares: Instead of restricted stock units, the Company makes annual grants of performance shares to members of its executive management. The 2023 performance criteria for these performance shares (organic sales growth, free cash flow growth, and earnings per share growth) were selected because the Company believes that they are important drivers of long-term stockholder value. The number of shares of 3M common stock that could actually be distributed at the end of the three-year performance period may be anywhere from 0% to 200% of each performance share granted, depending on the performance of the Company during such performance period. When granted, these performance shares are awarded at 100% of the estimated number of shares at the end of the three-year performance period and are reflected under “Granted” in the table below. Non-substantive vesting requires that expense for the performance shares be recognized over one or three years depending on when each individual became a 3M executive. The performance share grants accrue dividends; therefore, the grant date fair value is equal to the closing stock price on the date of grant. Since the rights to dividends are forfeitable, there is no impact on basic earnings per share calculations. Weighted average performance shares whose performance period is complete are included in computation of diluted earnings per share.

The following table summarizes performance share activity:



(Shares in thousands)	Number of Shares	Weighted Average Grant Date Fair Value
Undistributed balance —
As of January 1, 2023	391	$	157.98
Granted	203	110.21
Distributed	(146)	153.21
Performance change	(15)	162.26
Forfeited	(73)	137.66
As of December 31, 2023	360	136.95

As of December 31, 2023, there was $3 million of compensation expense that has yet to be recognized related to performance shares. This expense is expected to be recognized over the remaining weighted-average earnings period of 20 months.

The following table summarizes additional information relative to performance shares for the respective years:


(in millions, except per-share amounts)	2023		2022		2021
Weighted average grant date fair value per performance share that were granted	$	110.21	$	144.77	$	176.79
Intrinsic value of performance shares that were distributed	$	19	$	21	$	22
Tax benefit realized related to performance shares that were distributed	5		4		4

General Employees’ Stock Purchase Plan (GESPP): As of December 31, 2023, shareholders have approved 60 million shares for issuance under the Company’s GESPP. Substantially all employees are eligible to participate in the plan. Participants are granted options at 85% of market value at the date of grant. There are no GESPP shares under option at the beginning or end of each year because options are granted on the first business day and exercised on the last business day of the same month.

The weighted-average fair value per option granted during 2023, 2022 and 2021 was $15.77, $21.20 and $27.80, respectively. The fair value of GESPP options was based on the 15% purchase price discount. The Company recognized compensation expense for GESPP options of $21 million, $31 million, and $32 million in 2023, 2022 and 2021, respectively.