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Share-Based Compensation Plans and Other Incentive Plans
12 Months Ended
Dec. 31, 2017
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
Share-Based Compensation Plans and Other Incentive Plans
Share-Based Compensation Plans and Other Incentive Plans
The Company grants options and stock appreciation rights to acquire shares of common stock to certain employees and to existing option holders of acquired companies in connection with the merging of option plans following an acquisition. Each option granted and stock appreciation right has an exercise price of no less than 100% of the fair market value of the common stock on the date of the grant. The awards have a contractual life of five to ten years and vest over two to three years. In conjunction with a change in control, stock options and stock appreciation rights assumed or replaced with comparable stock options or stock appreciation rights only become exercisable if the holder is also involuntarily terminated (for a reason other than cause) or resigns for good reason within 24 months of a change in control.
Restricted stock unit (“RSU”) grants consist of shares or the rights to shares of the Company’s common stock which are awarded to certain employees and non-employee directors. The grants are restricted such that they are subject to substantial risk of forfeiture and to restrictions on their sale or other transfer by the employee. In conjunction with a change in control, shares of RSUs assumed or replaced with comparable shares of RSUs will only have the restrictions lapse if the holder is also involuntarily terminated (for a reason other than cause) or resigns for good reason within 24 months of a change in control.
Performance-based stock options (“performance options”) and market stock units ("MSUs") have been granted to certain Company executive officers. Performance options have a three-year performance period and are granted as a target number of units subject to adjustment based on company performance. Each performance option granted has an exercise price of no less than 100% of the fair market value of the common stock on the date of the grant. The awards have a contractual life of ten years. Shares ultimately issued for performance option awards granted are based on the actual total shareholder return (“TSR”) compared to the S&P 500 over the three year performance period based on a payout factor that corresponds to actual TSR results as established at the date of grant. Vesting occurs on the third anniversary of the grant date. Under the terms of the MSUs, vesting is conditioned upon continuous employment until the vesting date and the payout factor is at least 60% of the share price on the award date. The payout factor is the share price on vesting date divided by share price on award date, with a maximum of 200%. The share price used in the payout factor is calculated using an average of the closing prices on the grant or vesting date, and the 30 calendar days immediately preceding the grant or vesting date. Vesting occurs ratably over three years.
On August 25, 2015, in conjunction with the issuance of the Senior Convertible Notes, and on March 9, 2017, the Company approved grants of performance-contingent stock options (“PCSOs”) to certain executive officers. The PCSOs vest upon satisfaction of the following stock price hurdles which must be maintained for 10-consecutive trading days within the performance period ending August 25, 2018 and continuous employment over the vesting period. For PCSOs granted on August 25, 2015, 20% of the total award will vest at an $85 stock price, an additional 30% of the total award will vest at a $102.50 stock price, and the final 50% of the total award will vest at a $120 stock price. For options granted March 9, 2017, 44% of the total award will vest at an $85 stock price, an additional 24% of the total award will vest at a $102.50 stock price, and the 32% of the award will vest at a $120 stock price. If any stock price hurdles are not met during the performance period, the corresponding portion of the options will not vest and will be forfeited. The August 25, 2015 awards have a seven-year term and a per share exercise price of $68.50. The March 9, 2017 awards have a five and a half year term and a per share exercise price of $81.37.

The employee stock purchase plan allows eligible participants to purchase shares of the Company’s common stock through payroll deductions of up to 20% of eligible compensation on an after-tax basis. Plan participants cannot purchase more than $25,000 of stock in any calendar year. The price an employee pays per share is 85% of the lower of the fair market value of the Company’s stock on the close of the first trading day or last trading day of the purchase period. The plan has two purchase periods, the first from October 1 through March 31 and the second from April 1 through September 30. For the years ended December 31, 2017, 2016 and 2015, employees purchased 0.8 million, 0.9 million and 1.0 million shares, respectively, at purchase prices of $63.96 and $72.11, $57.60 and $64.69, and $52.99 and $56.67, respectively.
Significant Assumptions Used in the Estimate of Fair Value
The Company calculates the value of each employee stock option, estimated on the date of grant, using the Black-Scholes option pricing model. The weighted-average estimated fair value of employee stock options granted during 2017, 2016 and 2015 was $15.16, $13.09 and $10.21, respectively, using the following weighted-average assumptions:
 
2017
 
2016
 
2015
Expected volatility
24.0
%
 
23.7
%
 
20.0
%
Risk-free interest rate
2.1
%
 
1.4
%
 
1.6
%
Dividend yield
3.5
%
 
2.9
%
 
2.9
%
Expected life (years)
5.9

 
6.0

 
6.0


The Company calculates the value of each performance option, MSU, and PCSO using the Monte Carlo Simulation, estimated on the date of grant. The fair value of performance options, MSUs, and PCSOs granted during 2017 was $21.47, $85.74 and $7.76, respectively. The fair value of performance options and MSUs granted during 2016 was $19.80 and $76.48, respectively. The fair value of performance options, MSUs, and PCSOs granted during 2015 was $17.42, $60.37 and $3.97, respectively. The following assumptions were used for the calculations.
 
2017
Performance Options
 
2016
Performance Options
 
2015
Performance Options
Expected volatility of common stock
24.1
%
 
25.3
%
 
21.0
%
Expected volatility of the S&P 500
25.6
%
 
19.8
%
 
23.3
%
Risk-free interest rate
2.4
%
 
1.7
%
 
1.8
%
Dividend yield
3.7
%
 
2.8
%
 
2.9
%
Expected life (years)
6.5

 
6.5

 
6.5


 
2017
Market Stock Units
 
2016
Market Stock Units
 
2015
Market Stock Units
Expected volatility of common stock
24.1
%
 
24.2
%
 
19.3
%
Risk-free interest rate
1.7
%
 
1.1
%
 
1.1
%
Dividend yield
2.9
%
 
2.8
%
 
2.9
%
 
2017 PCSOs
 
2015 PCSOs
Expected volatility of common stock
24.1
%
 
26.0
%
Risk-free interest rate
1.8
%
 
1.5
%
Dividend yield
3.0
%
 
3.1
%
Expected life (years)
3.5

 
5

The Company uses the implied volatility for traded options on the Company’s stock as the expected volatility assumption in the valuation of stock options, performance options, MSUs, and PCSOs. The selection of the implied volatility approach was based upon the availability of actively traded options on the Company’s stock and the Company’s assessment that implied volatility is more representative of future stock price trends than historical volatility. The Company uses the historical volatility as the expected volatility assumption in the valuation of performance options in order to calculate the correlation coefficients between the S&P 500 and the Company's stock, which can only be calculated using historical data.

The risk-free interest rate assumption is based upon the average daily closing rates during the year for U.S. Treasury notes that have a life which approximates the expected life of the grant. The dividend yield assumption is based on the Company’s future expectation of dividend payouts. The expected life represents the average of the contractual term of the options and the weighted average vesting period for all option tranches.
The Company has applied forfeiture rates, estimated based on historical data, of 10%-35% to the stock option fair values calculated by the Black-Scholes option pricing model. These estimated forfeiture rates are applied to grants based on their remaining vesting term and may be revised in subsequent periods if actual forfeitures differ from these estimates.
The following table summarizes information about the total stock options outstanding and exercisable under all stock option plans, including performance options and PCSOs, at December 31, 2017 (in thousands, except exercise price and years):
 
Options Outstanding
 
Options Exercisable
Exercise price range
No. of
options
 
Wtd. avg.
Exercise
Price
 
Wtd. avg.
contractual
life (in yrs.)
 
No. of
options
 
Wtd. avg.
Exercise
Price
 
Wtd. avg.
contractual
life (in yrs.)
Under $30
537

 
$
27

 
2
 
537

 
$
27

 
2
$30-$40
1,557

 
39

 
3
 
1,557

 
39

 
3
$41-$50
8

 
45

 
3
 
8

 
45

 
3
$51-$60
842

 
55

 
5
 
834

 
55

 
5
$61-$70
2,790

 
68

 
5
 
799

 
66

 
6
$71-$80
596

 
72

 
8
 
86

 
72

 
8
$81 and over
952

 
82

 
8
 
3

 
81

 
9
 
7,282

 
 
 
 
 
3,824

 
 
 
 

As of December 31, 2017, the weighted average contractual life for options outstanding and exercisable was five and four years, respectively.
Current Year Activity
Total share-based compensation activity was as follows (in thousands, except exercise price):
 
Stock Options
 
Performance Options*
 
Restricted Stock Units
 
Market Stock Units
Shares Outstanding in Thousands
No. of Options Outstanding
 
Wtd. Avg. Exercise Price of Shares
 
No. of Options Outstanding
 
Wtd. Avg. Exercise Price of Shares
 
No. of Non-Vested Awards
 
Wtd. Avg. Grant Date Fair Value
 
No. of Non-Vested Awards
 
Wtd. Avg. Grant Date Fair Value
Balance as of January 1, 2017
5,218

 
$
50

 
2,066

 
$
69

 
1,333

 
$
63

 
116

 
$
69

Granted
385

 
82

 
612

 
81

 
650

 
78

 
71

 
86

Releases/Exercised
(935
)
 
53

 

 

 
(656
)
 
64

 
(54
)
 
68

Adjustment for payout factor

 

 

 

 

 

 
6

 
69

Forfeited/Canceled
(64
)
 
76

 

 

 
(70
)
 
71

 

 

Balance as of December 31, 2017
4,604

 
$
52

 
2,678

 
$
72

 
1,257

 
$
70

 
139

 
$
78

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Vested or expected to vest
4,283

 
48

 
464

 
73

 
519

 
64

 
79

 
65

* Inclusive of PCSO awards
At December 31, 2017 and 2016, 9.6 million and 11.2 million shares, respectively, were available for future share-based award grants under the current share-based compensation plan, covering all equity awards to employees and non-employee directors.
Total Share-Based Compensation Expense
Compensation expense for the Company’s share-based compensation plans was as follows: 
Years ended December 31
2017
 
2016
 
2015
Share-based compensation expense included in:
 
 
 
 
 
Costs of sales
$
9

 
$
9

 
$
9

Selling, general and administrative expenses
43

 
45

 
52

Research and development expenditures
14

 
14

 
17

Share-based compensation expense included in Operating earnings
66

 
68

 
78

Tax benefit
22

 
21

 
24

Share-based compensation expense, net of tax
$
44

 
$
47

 
$
54

Decrease in basic earnings per share
$
(0.27
)
 
$
(0.28
)
 
$
(0.25
)
Decrease in diluted earnings per share
$
(0.27
)
 
$
(0.27
)
 
$
(0.25
)

At December 31, 2017, the Company had unrecognized compensation expense related to RS, RSUs, and MSUs of $56 million, net of estimated forfeitures, expected to be recognized over the weighted average period of approximately two years. The total fair value of RS, RSU and MSU shares vested during the years ended December 31, 2017, 2016, and 2015 was $39 million, $54 million, and $55 million, respectively. The aggregate fair value of outstanding RS, RSUs, and MSUs as of December 31, 2017 was $98 million.
At December 31, 2017, the Company had $15 million of total unrecognized compensation expense, net of estimated forfeitures, related to stock option plans including performance options and PCSO's that will be recognized over the weighted average period of approximately two years, and $4 million of unrecognized compensation expense related to the employee stock purchase plan that will be recognized over the remaining purchase period. Cash received from stock option exercises and the employee stock purchase plan was $82 million, $93 million, and $84 million for the years ended December 31, 2017, 2016, and 2015, respectively. The total intrinsic value of options exercised during the years ended December 31, 2017, 2016, and 2015 was $31 million, $16 million, and $15 million, respectively. The aggregate intrinsic value for options outstanding and exercisable as of December 31, 2017 was $227 million and $165 million, respectively, based on a December 31, 2017 stock price of $90.34 per share.
Motorola Solutions Incentive Plans
The Company's incentive plans provide eligible employees with an annual payment, calculated as a percentage of an employee’s eligible earnings, in the year after the close of the current calendar year if specified business goals and individual performance targets are met. The expense for awards under these incentive plans for the years ended December 31, 2017, 2016 and 2015 was $122 million, $114 million and $119 million, respectively.
Long-Range Incentive Plan
The Long-Range Incentive Plan (“LRIP”) rewards elected officers for the Company’s achievement of specified business goals during the period, based on a single performance objective measured over a three-year period. The expense for LRIP for the years ended December 31, 2017, 2016 and 2015 was $9 million, $12 million and $12 million, respectively.