On June 5, 2014, the Activision Blizzard, Inc. 2014 Incentive Plan (the “2014 Plan”) became effective. Under the 2014 Plan, the Compensation Committee of our Board of Directors is authorized to provide share-based compensation in the form of stock options, share appreciation rights, restricted stock, restricted stock units, performance shares, and other performance- or value-based awards structured by the Compensation Committee within parameters set forth in the 2014 Plan. As of the effective date of the 2014 Plan, we had ceased making awards under our prior equity incentive plans (collectively, the “Prior Plans”), although such plans remain in effect to the extent that they continue to govern outstanding awards.

While the Compensation Committee has broad discretion to create equity incentives, our current share-based compensation program generally utilizes a combination of options and restricted stock units. The majority of our options have time-based vesting schedules, generally vesting annually over a period of three years to five years, and expire 10 years from the grant date. In addition, under the terms of the 2014 Plan, the exercise price for the options must be equal to or greater than the closing price per share of our common stock on the date the award is granted, as reported on Nasdaq. Restricted stock units have time-based vesting schedules, generally vesting in their entirety on an anniversary of the date of grant, or vest annually over a period of three years to five years, and may also be contingent on the achievement of specified performance measures, including those which are market-based. Achievement against such performance measures typically results in vesting of amounts that are different than the target shares at grant based on over- or under-achievement against the performance targets. Typically, performance-based RSUs provide for vesting up to 125% of the grant date target shares if performance targets are sufficiently overachieved (and will be cancelled without the vesting of any shares if the threshold level of performance measures is not met), but in certain instances some of our unvested performance-based RSUs can vest up to 250% of the grant date target amount based on achievement against the performance targets.

As of the date it was approved by our shareholders, there were 46 million shares available for issuance under the 2014 Plan. The number of shares of our common stock reserved for issuance under the 2014 Plan has been, and may be further, increased from time to time by: (1) the number of shares relating to awards outstanding under any Prior Plan that: (i) expire, or are forfeited, terminated or canceled, without the issuance of shares; (ii) are settled in cash in lieu of shares; or (iii) are exchanged, prior to the issuance of shares of our common stock, for awards not involving our common stock; (2) if the exercise price of any option outstanding under any Prior Plans is, or the tax withholding requirements with respect to any award outstanding under any Prior Plans are, satisfied by withholding shares otherwise then deliverable in respect of the award or the actual or constructive transfer to the Company of shares already owned, the number of shares equal to the withheld or transferred shares; and (3) if a share appreciation right is exercised and settled in shares, a number of shares equal to the difference between the total number of shares with respect to which the award is exercised and the number of shares actually issued or transferred. As of December 31, 2021, we had approximately 13 million shares of our common stock reserved for future issuance under the 2014 Plan. Shares issued in connection with awards made under the 2014 Plan are generally issued as new stock issuances.

The fair value of stock options granted are principally estimated using a binomial-lattice model. The inputs in our binomial-lattice model include expected stock price volatility, risk-free interest rate, dividend yield, contractual term, and vesting schedule, as well as measures of employees’ cancellation, exercise, and post-vesting termination behavior.


	Employee Stock Options
	For the Years Ended December 31,
	2021			2020			2019
Expected life (in years)	7.61			7.70			7.85
Volatility	31.06		%	30.89		%	30.00		%
Risk free interest rate	1.29		%	0.70		%	1.90		%
Dividend yield	0.51		%	0.53		%	0.76		%
Weighted-average grant date fair value	$	30.65		$	25.93		$	17.12
Stock price volatility range:
Low	31.00		%	30.00		%	30.00		%
High	35.00		%	39.00		%	38.17		%

The expected life of employee stock options is a derived output of the binomial-lattice model and represents the weighted-average period the stock options are expected to remain outstanding. A binomial-lattice model assumes that employees will exercise their options when the stock price equals or exceeds an exercise multiple. The exercise multiple is based on historical employee exercise behaviors.

To estimate volatility for the binomial-lattice model, we consider the implied volatility of exchange-traded options on our stock to estimate short-term volatility, the historical volatility of our common shares during the option’s contractual term to estimate long-term volatility, and a statistical model to estimate the transition from short-term volatility to long-term volatility.

Share-based compensation expense recognized is based on awards ultimately expected to vest and therefore has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant based on historical experience and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

The fair value of the Company’s RSU awards granted are generally based upon the closing price of the Company’s common stock on the date of grant reduced by the present value of dividends expected to be paid on our common stock prior to vesting. We also grant market-based RSU awards, from time to time, the fair value of which is determined using a Monte Carlo simulation. Such market-based RSU awards include performance conditions based on our own stock price and may also include performance conditions that compare our stock price performance to an index, such as the S&P 500 Total Shareholder Return index. The valuation assumptions utilized in the Monte Carlo model are generally consistent with the inputs discussed in the valuation of stock options above. The weighted average risk free interest rate, volatility, and dividend yield utilized in the Monte Carlo model for market-based RSU awards in 2020 were 0.11%, 37.39%, and 0.47%, respectively.

On December 14, 2021, we granted approximately 1.6 million RSU awards which were valued at approximately $70.00 per share rather than the closing share price on the date of grant of $59.52. None of these awards were granted to named executive officers of the Company. While these grants were not made in contemplation of the Company’s recent announcement of the merger agreement (see N ote 23) entered into with Microsoft, in light of the proximity to when the Company became aware of a potential merger, and date of the merger agreement, the Company has determined the fair value for these awards should consider potential subsequent value appreciation that would be expected from the market upon announcement of the merger. In determining the adjustment to the closing share price to estimate the fair value of these awards, the Company considered various factors such as, observable share prices before and after announcement of a merger in recent transactions, the offer price range known at time of the grants being made, the final merger per share consideration, the actual increase in share price seen after announcement of the merger, industry practices in applying liquidity discounts and probability of the merger being entered into. The awards vest over their requisite service period and do not provide for any accelerated vesting or other features as a result of entering into or upon closing of the merger.

We developed the assumptions used in the models above, including measures of employees’ exercise and post-vesting termination behavior. Our ability to accurately estimate the fair value of share-based payment awards at the grant date depends upon the accuracy of the model and our ability to accurately forecast model inputs for as long as 10 years into the future. Although the fair value of employee stock options is determined using an option-pricing model, the estimates that are produced by this model may not be indicative of the fair value observed between a willing buyer and a willing seller as there are not current active markets for the trading of employee stock options and other share-based instruments.


	Number of shares (in thousands)	Weighted-average exercise price per stock option		Weighted-average remaining contractual term (in years)	Aggregate intrinsic value (in millions)
Outstanding stock options at December 31, 2020	11,297	$	53.84
Granted	754	92.56
Exercised	(1,954)	45.84
Forfeited	(866)	65.23
Expired	(98)	45.15
Outstanding stock options at December 31, 2021	9,133	$	57.77	7.04	$	125
Vested and expected to vest at December 31, 2021	8,798	$	56.96	6.98	$	124
Exercisable at December 31, 2021	5,711	$	48.90	6.26	$	107

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (i.e., the difference between our closing stock price on the last trading day of the period and the exercise price, times the number of shares for options where the closing stock price is greater than the exercise price) that would have been received by the option holders had all option holders exercised their options on that date. This amount changes based on the market value of our stock. The total intrinsic value of options actually exercised was $88 million, $174 million, and $80 million for the years ended December 31, 2021, 2020, and 2019, respectively. The total grant date fair value of options that vested during the years ended December 31, 2021, 2020, and 2019 was $57 million, $62 million, and $94 million, respectively.

We grant RSUs, which represent the right to receive shares of our common stock. Vesting for RSUs is generally contingent upon the holder’s continued employment with us and may be subject to other conditions (which may include the satisfaction of a performance measure). Also, certain of our performance-based RSUs, including those that are market-based, include a range of shares that may be released at vesting, which are above or below the targeted number of RSUs based on actual performance relative to the performance measure. If the vesting conditions are not met, unvested RSUs will be forfeited. Upon vesting of the RSUs, we may withhold shares otherwise deliverable to satisfy tax withholding requirements.

Certain of our performance-based RSUs did not have an accounting grant date as of December 31, 2021, as for each such grant there is not a mutual understanding between the Company and the employee of the performance terms. Generally, these performance terms relate to operating income performance for future years, the goals for which have yet to be set. As of December 31, 2021, based on the target potential shares that could be earned, there were 2.0 million performance-based RSUs outstanding for which the accounting grant date had not been set, of which 1.3 million were 2021 grants. Accordingly, no grant date fair value was established and the weighted average grant date fair values calculated above excludes these RSUs.

At December 31, 2021, approximately $505 million of total unrecognized compensation cost was related to RSUs and is expected to be recognized over a weighted-average period of 1.79 years. Of the total unrecognized compensation cost, $62 million was related to performance-based RSUs, which is expected to be recognized over a weighted-average period of 1.00 year. The total grant date fair value of RSUs that vested during the years ended December 31, 2021, 2020, and 2019 was $306 million, $82 million, and $147 million, respectively.


	For the Years Ended December 31,
	2021		2020		2019
Cost of revenues—product sales: Software royalties, amortization, and intellectual property licenses	$	17	$	14	$	19
Cost of revenues—in-game, subscription, and other: Game Operations and Distribution Costs	7		1		1
Cost of revenues—in-game, subscription, and other: Software royalties, amortization, and intellectual property licenses	—		—		1
Product development	211		42		53
Sales and marketing	44		21		10
General and administrative	229		140		82
Share-based compensation expense before income taxes	508		218		166
Income tax benefit	(36)		(28)		(29)
Total share-based compensation expense, net of income tax benefit	$	472	$	190	$	137

Share-based compensation expense for the year ended December 31, 2021 includes $194 million, inclusive of $20 million of expense that was capitalized as part of software development, for liability awards accounted for under ASC 718. The liability awards primarily relate to recent changes to the Company’s compensation payments for 2021 for which the Company determined to settle amounts not yet paid as of December 31, 2021 under its annual performance plans in stock as opposed to cash and further to provide such incentives, to eligible employees, at no less than target performance without regard to whether target performance was achieved.