STOCK-BASED COMPENSATION

We currently have three stock-based compensation plans: the 2010 Equity Incentive Plan (“2010 Plan”), our Employee Stock Purchase Plan (“ESPP”) and the 2002 Nonemployee Director Stock Incentive Plan. Additionally, as part of our acquisition of HauteLook in 2011, we granted awards from shares available that were not allocated to a specific plan.

In 2010, our shareholders approved the adoption of the 2010 Plan, which replaced the 2004 Equity Incentive Plan (“2004 Plan”). The 2010 Plan authorizes the grant of stock options, performance share units, restricted stock units, stock appreciation rights and both restricted and unrestricted shares of common stock to employees. The aggregate number of shares to be issued under the 2010 Plan may not exceed 27.6 plus any shares currently outstanding under the 2004 Plan which are forfeited or which expire during the term of the 2010 Plan. No future grants will be made under the 2004 Plan. As of February 1, 2014, we have 70.4 shares authorized, 36.5 shares issued and outstanding and 19.4 shares remaining available for future grants under the 2010 Plan.

Under the ESPP, employees may make payroll deductions of up to 10% of their base and bonus compensation. At the end of each six-month offering period, participants may apply their accumulated payroll deductions toward the purchase of shares of our common stock at 90% of the fair market value on the last day of the offer period. As of February 1, 2014, we had 12.6 shares authorized and 3.5 shares available for issuance under the ESPP. We issued 0.3 shares under the ESPP during 2013. At the end of 2013 and 2012, we had current liabilities of $6 and $5, for future purchases of shares under the ESPP.

The 2002 Nonemployee Director Stock Incentive Plan authorizes the grant of stock awards to our nonemployee directors. These awards may be deferred or issued in the form of restricted or unrestricted stock, non-qualified stock options or stock appreciation rights. As of February 1, 2014, we had 0.9 shares authorized and 0.5 shares available for issuance under this plan. In 2013, we deferred shares with a total expense of less than $1.

The following table summarizes our stock-based compensation expense:



Fiscal year	2013			2012			2011
Stock options		$44			$36			$32
HauteLook stock compensation	8			9			9
Performance share units	—			3			4
Employee stock purchase plan	2			2			2
Other	4			3			3
Total stock-based compensation expense, before income tax benefit	58			53			50
Income tax benefit	(19		)	(17		)	(17		)
Total stock-based compensation expense, net of income tax benefit		$39			$36			$33

The stock-based compensation expense before income tax benefit was recorded in our Consolidated Statements of Earnings as follows:



Fiscal year	2013		2012		2011
Cost of sales and related buying and occupancy costs		$15		$14		$12
Selling, general and administrative expenses	43		39		38
Total stock-based compensation expense, before income tax benefit		$58		$53		$50

The benefits of tax deductions in excess of the compensation cost recognized for stock-based awards are classified as financing cash inflows and are reflected as “Excess tax benefit from stock-based compensation” in the Consolidated Statements of Cash Flows.

Stock Options

We used the following assumptions to estimate the fair value for stock options at grant date:



Fiscal year	2013		2012		2011
Risk-free interest rate: Represents the yield on U.S. Treasury zero-coupon securities that mature over the 10-year life of the stock options.	0.2% – 1.8%		0.3% – 2.0%		0.4% – 3.5%
Weighted-average volatility: Based on a combination of the historical volatility of our common stock and the implied volatility of exchange-traded options for our common stock.	31.8	%	36.5	%	39.0	%
Weighted-average expected dividend yield: Our forecasted dividend yield for the next 10 years.	2.0	%	2.1	%	2.0	%
Expected life in years: Represents the estimated period of time until option exercise. The expected term of options granted was derived from the output of the Binomial Lattice option valuation model and was based on our historical exercise behavior, taking into consideration the contractual term of the option and our employees’ expected exercise and post-vesting employment termination behavior.	6.7		6.1		5.9

The weighted-average fair value per option at the grant date was $14, $15 and $15 in 2013, 2012 and 2011. In 2013, 2012 and 2011, stock option awards to employees were approved by the Compensation Committee of our Board of Directors and their exercise price was set at $54, $53 and $45, the closing price of our common stock on March 4, 2013, February 22, 2012 and February 25, 2011 (the dates of grant). The awards are determined based upon a percentage of the recipients’ base salary and the fair value of the stock options. In 2013, we awarded stock options to 1,625 employees, compared with 1,477 and 1,331 employees in 2012 and 2011.

As of February 1, 2014, we have 13.8 options outstanding under the 2010 Plan. Options vest over four years, and expire 10 years after the date of grant. A summary of the stock option activity for 2013 is presented below:



Fiscal year	2013
	Shares	Weighted- average exercise price		Weighted-average remaining contractual life (years)	Aggregate intrinsic value
Outstanding, beginning of year	13.5		$38
Granted	3.7	54
Exercised	(3.0)	29
Cancelled	(0.4)	51
Outstanding, end of year	13.8		$43	7		$195
Options exercisable at end of year	6.7		$35	5		$148
Options vested or expected to vest at end of year	13.1		$43	7		$190

The total intrinsic value of options exercised during 2013, 2012 and 2011 was $89, $90 and $80. The total fair value of stock options vested during 2013, 2012 and 2011 was $34, $32 and $29. As of February 1, 2014, the total unrecognized stock-based compensation expense related to nonvested stock options was $63, which is expected to be recognized over a weighted-average period of 26 months.

HauteLook

As discussed in Note 2: HauteLook, consideration for our acquisition of HauteLook payable in Nordstrom stock includes ongoing vesting requirements for HauteLook’s employees. These amounts are recorded as compensation expense as the related service is performed over the respective employee vesting periods of up to four years after the acquisition date.

A summary of the nonvested restricted stock award activity related to HauteLook for 2013 is as follows:



Fiscal year	2013
	Shares		Weighted- average grant- date fair value
Outstanding, beginning of year	0.3			$42
Vested	(0.2	)	42
Outstanding, end of year	0.1			$42

The total fair value of restricted stock vested during 2013 was $7. As of February 1, 2014, the total unrecognized stock-based compensation expense related to HauteLook nonvested restricted stock awards was $1, which is expected to be recognized over a weighted-average period of three months.

Performance Share Units

We grant performance share units to executive officers as one of the ways to align compensation with shareholder interests. Performance share units are earned after a three-year performance cycle only when our total shareholder return (reflecting daily stock price appreciation and compounded reinvestment of dividends) is positive and outperforms companies in a defined group of competitors determined by the Compensation Committee of our Board of Directors. The percentage of units that are earned depends on our relative position at the end of the performance cycle and can range from 0% to 175% of the number of units granted.

Performance share units are payable in either cash or stock as elected by the employee; therefore, they are classified as a liability award. The liability is remeasured, with a corresponding adjustment to earnings, at each fiscal quarter-end during the performance cycle. The performance share unit liability is remeasured using the estimated percentage of units earned multiplied by the closing market price of our common stock on the current period-end date and is pro-rated based on the amount of time passed in the vesting period. The price used to determine the amount of cash received for the performance share units upon vesting is the closing market price of our common stock on the last day of the performance cycle.

Following is a summary of performance share unit activity:



Fiscal year	2013¹
Outstanding units, beginning of year	104,908
Granted	69,361
Vested	—
Cancelled	(4,244	)
Outstanding units, end of year²	170,025

¹Assumes performance share units at 100% of the number of units granted.

²On February 26, 2014, the Compensation Committee of our Board of Directors determined that 53,767 performance share units granted in 2011 and outstanding as of February 1, 2014 were not earned based on the defined performance criteria above. Accordingly, those performance share units were cancelled as of that date.

No performance share units were earned and vested in 2013 and as of February 1, 2014, no grants currently meet the minimum vesting thresholds.