Share-Based Compensation Plans

Northern Trust recognizes expense for the grant-date fair value of share-based compensation granted to employees and non-employee directors.

Total compensation expense for share-based payment arrangements to employees and the associated tax impacts were as follows for the periods presented.

TABLE 107: TOTAL COMPENSATION EXPENSE FOR SHARE-BASED PAYMENT ARRANGEMENTS TO EMPLOYEES



	FOR THE YEAR ENDED DECEMBER 31,
(In Millions)	2018		2017		2016
Restricted Stock Unit Awards	$	96.3	$	87.3	$	60.2
Stock Options	2.6		9.0		9.0
Performance Stock Units	32.0		31.7		17.6

Total Share-Based Compensation Expense	$	130.9	$	128.0	$	86.8
Tax Benefits Recognized	$	32.5	$	48.7	$	32.8

As of December 31, 2018, there was $84.5 million of unrecognized compensation cost related to unvested share-based compensation arrangements granted under the Corporation’s share-based compensation plans. That cost is expected to be recognized as expense over a weighted-average period of approximately two years.

The Northern Trust Corporation 2017 Long-Term Incentive Plan (2017 Plan) is administered by the Compensation and Benefits Committee (Committee) of the Board of Directors. All employees of the Corporation and its subsidiaries and all directors of the Corporation are eligible to receive awards under the 2017 Plan. The 2017 Plan provides for the grant of nonqualified and incentive stock options; tandem and free-standing stock appreciation rights; stock awards in the form of restricted stock, restricted stock units and other stock awards; and performance awards.

Beginning with grants made on February 21, 2017 under the Northern Trust Corporation 2012 Stock Plan (2012 Plan), restricted stock unit and performance stock unit grants continue to vest in accordance with the original terms of the award if the applicable employee retires after satisfying applicable age and service requirements. For all applicable periods, stock option grants continue to vest in accordance with the original terms of the award if the employee meets applicable age and service requirements upon separation from service.

Grants are outstanding under the 2017 Plan, the 2012 Plan, and the Amended and Restated Northern Trust Corporation 2002 Stock Plan (2002 Plan). The 2017 Plan was approved by stockholders in April 2017. Upon approval of the 2017 Plan, no additional shares have been or will be granted under the 2012 Plan or 2002 Plan. The total number of shares of the Corporation’s common stock authorized for issuance under the 2017 Plan is 20,000,000 plus shares forfeited under the 2012 Plan and 2002 Plan. As of December 31, 2018, shares available for future grant under the 2017 Plan, including shares forfeited under the 2012 Plan and 2002 Plan, totaled 19,314,935.

The following describes Northern Trust’s share-based payment arrangements and applies to awards under the 2017 Plan, 2012 Plan and the 2002 Plan, as applicable.

Stock Options. Stock options consist of options to purchase common stock at prices not less than 100% of the fair value thereof on the date the options are granted. Options have a maximum 10 year life and generally vest and become exercisable in 1 year to 4 years after the date of grant. All options terminate at such time as determined by the Committee and as provided in the terms and conditions of the respective option grants.

There were no options granted during the year ended December 31, 2018. The weighted-average assumptions used for options granted during the years ended December 31, 2017 and 2016 are as follows:

TABLE 108: WEIGHTED-AVERAGE ASSUMPTIONS USED FOR OPTIONS GRANTED



	2017		2016
Expected Term (in Years)	6.9		7.0
Dividend Yield	1.81	%	2.57	%
Expected Volatility	23.2		32.3
Risk-Free Interest Rate	2.11		1.45

The expected term of options represents the period of time options granted are expected to be outstanding based primarily on the historical exercise behavior attributable to previous option grants. Dividend yield represents the estimated yield from dividends paid on the Corporation’s common stock over the expected term of the options. Expected volatility is determined based on a combination of the historical volatility of Northern Trust’s stock price and the implied volatility of traded options on Northern Trust stock. The risk-free interest rate is based on the U.S. Treasury yield curve at the time of grant for a period equal to the expected term of the options granted.

The following table provides information about stock options granted, vested, and exercised in the years ended December 31, 2018, 2017, and 2016.

TABLE 109: STOCK OPTIONS GRANTED, VESTED, AND EXERCISED



	FOR THE YEAR ENDED DECEMBER 31,
(In Millions, Except Per Share Information)	2018		2017		2016
Weighted Average Grant-Date Per Share Fair Value of Stock Options Granted	$	—	$	19.18	$	14.84
Grant-Date Fair Value of Stock Options Vested	8.1		7.3		9.6
Stock Options Exercised
Intrinsic Value as of Exercise Date	28.5		74.7		83.9
Cash Received	32.6		108.0		233.8
Tax Deduction Benefits Realized	27.7		73.1		80.0

The following is a summary of changes in nonvested stock options for the year ended December 31, 2018.

TABLE 110: CHANGES IN NONVESTED STOCK OPTIONS



NONVESTED OPTIONS	SHARES		WEIGHTED- AVERAGE GRANT- DATE FAIR VALUE PER SHARE
Nonvested at December 31, 2017	1,246,505		$	17.25
Granted	—		—
Vested	(483,605	)	17.07
Forfeited or Cancelled	(5,162	)	19.18

Nonvested at December 31, 2018	757,738		$	17.36

A summary of the status of stock options at December 31, 2018, and changes during the year then ended, are presented in the table below.

TABLE 111: STATUS OF STOCK OPTIONS AND CHANGES



($ In Millions Except Per Share Information)	SHARES		WEIGHTED AVERAGE EXERCISE PRICE PER SHARE		WEIGHTED AVERAGE REMAINING CONTRACTUAL TERM (YEARS)	AGGREGATE INTRINSIC VALUE
Options Outstanding, December 31, 2017	3,073,098		$	60.99
Granted	—		—
Exercised	(575,662	)	56.55
Forfeited, Expired or Cancelled	(16,375	)	79.78

Options Outstanding, December 31, 2018	2,481,061		$	61.90	5.1	$	55.8

Options Exercisable, December 31, 2018	1,723,323		$	56.82	4.2	$	46.6

Restricted Stock Unit Awards. Restricted stock unit awards may be granted to participants which entitle them to receive a payment in the Corporation’s common stock or cash and such other terms and conditions as the Committee deems appropriate. Each restricted stock unit provides the recipient the opportunity to receive one share of stock for each stock unit that vests. The restricted stock units granted in 2018 predominately vest at a rate equal to 25% each year for four years on the anniversary of the grant. Restricted stock unit grants totaled 815,314, 863,308, and 1,301,693, with weighted average grant-date fair values of $103.74, $88.19, and $59.17 per share, for the years ended December 31, 2018, 2017, and 2016, respectively. The total fair value of restricted stock units vested during the years ended December 31, 2018, 2017, and 2016, was $66.4 million, $88.7 million, and $52.3 million, respectively.

A summary of the status of outstanding restricted stock unit awards at December 31, 2018, and changes during the year then ended, is presented in the table below.

TABLE 112: OUTSTANDING RESTRICTED STOCK UNIT AWARDS



($ In Millions)	NUMBER		AGGREGATE INTRINSIC VALUE
Restricted Stock Unit Awards Outstanding, December 31, 2017	3,399,438		$	339.6
Granted	815,314
Distributed	(1,016,846	)
Forfeited	(76,064	)

Restricted Stock Unit Awards Outstanding, December 31, 2018	3,121,842		$	261.0

Units Convertible, December 31, 2018	144,722		$	12.1

The following is a summary of nonvested restricted stock unit awards at December 31, 2018, and changes during the year then ended.

TABLE 113: NONVESTED RESTRICTED STOCK UNIT AWARDS



NONVESTED RESTRICTED STOCK UNITS	NUMBER		WEIGHTED AVERAGE GRANT- DATE FAIR VALUE PER UNIT		WEIGHTED AVERAGE REMAINING VESTING TERM (YEARS)
Nonvested at December 31, 2017	3,231,327		$	69.67	1.9
Granted	815,314		103.74
Vested	(993,457	)	66.82
Forfeited	(76,064	)	73.18

Nonvested at December 31, 2018	2,977,120		$	79.92	1.9

Performance Stock Units. Each performance stock unit provides the recipient the opportunity to receive one share of the Corporation’s common stock for each stock unit that vests over a three-year performance period, subject to satisfaction of specified performance targets that are a function of return on equity and continued employment until the end of the vesting period. For performance stock units outstanding as of December 31, 2018, and granted in 2016, the number of such units that may vest ranges from 0% to 125% of the original award granted based on the attainment of the applicable three-year average annual return on equity target. For performance stock units outstanding at December 31, 2018, and granted in 2017 or 2018, the number of such units that may vest ranges from 0% to 150% of the original award granted based on the attainment of the applicable three-year average annual return on equity target. Distribution of the shares is then made after vesting.

Performance stock unit grants totaled 242,232, 231,269, and 354,606 for the years ended December 31, 2018, 2017, and 2016, respectively, with weighted average grant-date fair values of $104.72, $69.80, and $62.67. Performance stock units outstanding at target level performance totaled 797,531, 817,432, and 859,502 at December 31, 2018, 2017, and 2016, respectively. Performance stock units had aggregate intrinsic values of $66.7 million, $81.7 million, and $76.5 million, and weighted average remaining vesting terms of 1.0 year, 1.1 years, and 1.5 years, at December 31, 2018, 2017, and 2016, respectively.

Non-employee Director Stock Awards. Stock units with total values of $1.2 million (11,363 units), $1.2 million (13,354 units), and $1.3 million (18,001 units) were granted to non-employee directors in 2018, 2017, and 2016, respectively, which vest or vested on the date of the annual meeting of the Corporation’s stockholders in the following years. Total expense recognized on these grants was $1.3 million, $1.3 million, and $1.3 million in 2018, 2017, and 2016, respectively. Stock units granted to non-employee directors do not have voting rights. Each stock unit entitles a director to one share of common stock at vesting, unless a director elects to defer receipt of the shares. Directors may elect to defer the payment of their annual stock unit grant and cash-based compensation until termination of services as director. Deferred cash compensation is converted into stock units representing shares of common stock of the Corporation. Distributions of deferred stock units are made in stock. For compensation deferred prior to January 1, 2018, distributions of the stock unit accounts that relate to cash-based compensation are made in cash based on the fair value of the stock units at the time of distribution. For compensation deferred on or after January 1, 2018, distributions of the stock unit accounts that relate to cash-based compensation are made in stock.