Note 6 — Share-Based Compensation

Our share-based compensation program is designed to attract and retain employees while also aligning employees’ interests with the interests of our shareholders. PepsiCo has granted stock options, restricted stock units (RSUs), performance stock units (PSUs), PepsiCo equity performance units (PEPunits) and long-term cash awards to employees under the shareholder-approved PepsiCo, Inc. Long-Term Incentive Plan (LTIP). Executives who are awarded long-term incentives based on their performance may generally elect to receive their grant in the form of stock options or RSUs, or a combination thereof. Executives who elect stock options receive four stock options for every one RSU that would have otherwise been granted. Certain executive officers and other senior executives do not have a choice and were granted 66% PSUs and 34% long-term cash, each of which are subject to pre-established performance targets.

The Company may use authorized and unissued shares to meet share requirements resulting from the exercise of stock options and the vesting of RSUs, PSUs and PEPunits.

As of December 29, 2018, 66 million shares were available for future share-based compensation grants under the LTIP.

The following table summarizes our total share-based compensation expense and excess tax benefits recognized:



	2018			2017				2016
Share-based compensation expense - equity awards	$	256		$	292			$	284
Share-based compensation expense - liability awards	20			13				5
Restructuring and impairment charges	(6		)	(2		)		5
Total	$	270		$	303			$	294
Income tax benefits recognized in earnings related to share-based compensation	$	45		$	89		^(a)	$	91
Excess tax benefits related to share-based compensation ^(b)	$	48		$	115			$	110


(a)	Reflects tax rates effective for the 2017 tax year.


(b)	Included in provision for income taxes in the income statement in 2018 and 2017; included in capital in excess of par value in the equity statement in 2016.

As of December 29, 2018, there was $282 million of total unrecognized compensation cost related to nonvested share-based compensation grants. This unrecognized compensation cost is expected to be recognized over a weighted-average period of two years.

Method of Accounting and Our Assumptions

The fair value of share-based award grants is amortized to expense over the vesting period, primarily three years. Awards to employees eligible for retirement prior to the award becoming fully vested are amortized to expense over the period through the date that the employee first becomes eligible to retire and is no longer required to provide service to earn the award. In addition, we use historical data to estimate forfeiture rates and record share-based compensation expense only for those awards that are expected to vest.

We do not backdate, reprice or grant share-based compensation awards retroactively. Repricing of awards would require shareholder approval under the LTIP.

Stock Options

A stock option permits the holder to purchase shares of PepsiCo common stock at a specified price. We account for our employee stock options under the fair value method of accounting using a Black-Scholes valuation model to measure stock option expense at the date of grant. All stock option grants have an exercise price equal to the fair market value of our common stock on the date of grant and generally have a 10-year term.

Our weighted-average Black-Scholes fair value assumptions are as follows:



	2018		2017		2016
Expected life	5 years		5 years		6 years
Risk-free interest rate	2.6	%	2.0	%	1.4	%
Expected volatility	12	%	11	%	12	%
Expected dividend yield	2.7	%	2.7	%	2.7	%

The expected life is the period over which our employee groups are expected to hold their options. It is based on our historical experience with similar grants. The risk-free interest rate is based on the expected U.S. Treasury rate over the expected life. Volatility reflects movements in our stock price over the most recent historical period equivalent to the expected life. Dividend yield is estimated over the expected life based on our stated dividend policy and forecasts of net income, share repurchases and stock price.

A summary of our stock option activity for the year ended December 29, 2018 is as follows:



	Options^(a)		Weighted-Average Exercise Price		Weighted-Average Contractual Life Remaining (years)	Aggregate Intrinsic Value^(b)
Outstanding at December 30, 2017	19,013		$	74.23
Granted	1,429		$	108.88
Exercised	(4,377	)	$	62.95
Forfeited/expired	(476	)	$	94.85
Outstanding at December 29, 2018	15,589		$	79.94	4.29	$	474,746
Exercisable at December 29, 2018	11,547		$	70.74	2.92	$	457,529
Expected to vest as of December 29, 2018	3,713		$	106.02	8.17	$	16,606


(a)	Options are in thousands and include options previously granted under the PBG plan. No additional options or shares were granted under the PBG plan after 2009.


(b)	In thousands.

Restricted Stock Units and Performance Stock Units

Each RSU represents our obligation to deliver to the holder one share of PepsiCo common stock when the award vests at the end of the service period. PSUs are awards pursuant to which a number of shares are delivered to the holder upon vesting at the end of the service period based on PepsiCo’s performance against specified financial and/or operational performance metrics. The number of shares may be increased to the maximum or reduced to the minimum threshold based on the results of these performance metrics in accordance with the terms established at the time of the award. During the vesting period, RSUs and PSUs accrue dividend equivalents that pay out in cash (without interest) if and when the applicable RSU or PSU vests and becomes payable.

The fair value of RSUs is measured at the market price of the Company’s stock on the date of grant. The fair value of PSUs is measured at the market price of the Company’s stock on the date of grant with the exception of awards with market conditions, for which we use the Monte-Carlo simulation model to determine the fair value. The Monte-Carlo simulation model uses the same input assumptions as the Black-Scholes model; however, it also further incorporates into the fair-value determination the possibility that the market condition may not be satisfied. Compensation costs related to these awards are recognized regardless of whether the market condition is satisfied, provided that the requisite service has been provided.

A summary of our RSU and PSU activity for the year ended December 29, 2018 is as follows:



	RSUs/PSUs^(a)		Weighted-Average Grant-Date Fair Value		Weighted-Average Contractual Life Remaining (years)	Aggregate Intrinsic Value^(a)
Outstanding at December 30, 2017	7,293		$	102.30
Granted ^(b)	2,634		$	108.75
Converted	(2,362	)	$	99.73
Forfeited	(647	)	$	105.21
Actual performance change ^(c)	257		$	98.92
Outstanding at December 29, 2018 ^(d)	7,175		$	105.13	1.22	$	791,878
Expected to vest as of December 29, 2018	6,667		$	104.90	1.15	$	735,813


(a)	In thousands.


(b)	Grant activity for all PSUs are disclosed at target.


(c)	Reflects the net number of PSUs above and below target levels based on actual performance measured at the end of the performance period.


(d)	The outstanding PSUs for which the performance period has not ended as of December 29, 2018, at the threshold, target and maximum award levels were zero, 0.9 million and 1.6 million, respectively.

PEPunits

PEPunits provide an opportunity to earn shares of PepsiCo common stock with a value that adjusts based upon changes in PepsiCo’s absolute stock price as well as PepsiCo’s Total Shareholder Return relative to the S&P 500 over a three-year performance period.

The fair value of PEPunits is measured using the Monte-Carlo simulation model.

PEPunits were last granted in 2015 and all 248,000 units outstanding at December 30, 2017, with a weighted average grant date fair value of $68.94, were converted to 278,000 shares during fiscal year 2018.

Long-Term Cash

Certain executive officers and other senior executives were granted long-term cash awards for which final payout is based on PepsiCo’s Total Shareholder Return relative to a specific set of peer companies and achievement of a specified performance target over a three-year performance period.

Long-term cash awards that qualify as liability awards under share-based compensation guidance are valued through the end of the performance period on a mark-to-market basis using the Monte Carlo simulation model until actual performance is determined.

A summary of our long-term cash activity for the year ended December 29, 2018 is as follows:



	Long-Term Cash Award^(a)			Balance Sheet Date Fair Value^(a)		Contractual Life Remaining (years)
Outstanding at December 30, 2017	$	33,200
Granted^(b)	20,926
Forfeited	(2,292		)
Actual performance change ^(c)	2,876
Outstanding at December 29, 2018 ^(d)	$	54,710		$	55,809	1.22
Expected to vest as of December 29, 2018	$	51,159		$	52,148	1.17


(a)	In thousands.


(b)	Grant activity for all long-term cash awards are disclosed at target.


(c)	Reflects the net number of long-term cash awards above and below target levels based on actual performance measured at the end of the performance period.


(d)	The outstanding long-term cash awards for which the performance period has not ended as of December 29, 2018, at the threshold, target and maximum award levels were zero, 37.3 million and 74.5 million, respectively.

Other Share-Based Compensation Data

The following is a summary of other share-based compensation data:



	2018		2017		2016
Stock Options
Total number of options granted ^(a)	1,429		1,481		1,743
Weighted-average grant-date fair value of options granted	$	9.80	$	8.25	$	6.94
Total intrinsic value of options exercised ^(a)	$	224,663	$	327,860	$	290,131
Total grant-date fair value of options vested ^(a)	$	15,506	$	23,122	$	18,840
RSUs/PSUs
Total number of RSUs/PSUs granted ^(a)	2,634		2,824		3,054
Weighted-average grant-date fair value of RSUs/PSUs granted	$	108.75	$	109.92	$	99.06
Total intrinsic value of RSUs/PSUs converted ^(a)	$	260,287	$	380,269	$	359,401
Total grant-date fair value of RSUs/PSUs vested ^(a)	$	232,141	$	264,923	$	257,648
PEPunits
Total intrinsic value of PEPunits converted ^(a)	$	30,147	$	39,782	$	38,558
Total grant-date fair value of PEPunits vested ^(a)	$	9,430	$	18,833	$	16,572


(a)	In thousands.

As of December 29, 2018 and December 30, 2017, there were approximately 248,000 and 250,000 outstanding awards, respectively, consisting primarily of phantom stock units that were granted under the PepsiCo Director Deferral Program and will be settled in shares of PepsiCo common stock pursuant to the LTIP at the end of the applicable deferral period, not included in the tables above.