Stock Based Compensation

During 2009, the Company obtained shareholder approval for the Macy’s 2009 Omnibus Incentive Compensation Plan under which up to 51 million shares of Common Stock may be issued. This plan is intended to help the Company attract and retain directors, officers, other key executives and employees and is also intended to provide incentives and rewards relating to the Company’s business plans to encourage such persons to devote themselves to the business of the Company. Prior to 2009, the Company had two equity plans; the Macy's 1995 Executive Equity Incentive Plan and the Macy's 1994 Stock Incentive Plan. After shareholders approved the 2009 Omnibus Incentive Compensation Plan, Common Stock may no longer be granted under the Macy's 1995 Executive Equity Incentive Plan or the Macy's 1994 Stock Incentive Plan. The following disclosures present the Company’s equity plans on a combined basis. The equity plan is administered by the Compensation and Management Development Committee of the Board of Directors (the “CMD Committee”). The CMD Committee is authorized to grant options, stock appreciation rights, restricted stock and restricted stock units to officers and key employees of the Company and its subsidiaries and to non-employee directors. There have been no grants of stock appreciation rights under the equity plans.

Stock option grants have an exercise price at least equal to the market value of the underlying common stock on the date of grant, have ten-year terms and typically vest ratably over four years of continued employment. Restricted stock and time-based restricted stock unit awards generally vest one to four years from the date of grant. Performance-based restricted stock units generally are earned based on the attainment of specified goals achieved over the performance period.

As of January 28, 2017, 16 million shares of common stock were available for additional grants pursuant to the Company’s equity plan. Shares awarded are generally issued from the Company's treasury stock.

Stock-based compensation expense included the following components:



	2016		2015		2014
	(millions)
Stock options	$	43	$	52	$	47
Restricted stock units	18		13		26
	$	61	$	65	$	73

All stock-based compensation expense is recorded in SG&A expense in the Consolidated Statements of Income.

As of January 28, 2017, the Company had $63 million of unrecognized compensation costs related to nonvested stock options, which is expected to be recognized over a weighted average period of approximately 1.7 years, and $21 million of unrecognized compensation costs related to nonvested restricted stock units, which is expected to be recognized over a weighted average period of approximately 1.4 years.

During 2016, 2015 and 2014, the CMD Committee approved awards of performance-based restricted stock units to certain senior executives of the Company. Each award reflects a target number of shares (“Target Shares”) that may be issued to the award recipient. These awards may be earned upon the completion of three-year performance periods ending February 2, 2019, February 3, 2018 and January 28, 2017, respectively. Whether units are earned at the end of the performance period will be determined based on the achievement of certain performance objectives set by the CMD Committee in connection with the issuance of the units. The performance objectives are based on the Company’s business plan covering the performance period. The performance objectives include achieving a cumulative EBITDA level for the performance period and also include an EBITDA as a percent to sales ratio and a return on invested capital ratio. The performance-based restricted stock units also include a performance objective relating to relative total shareholder return (“TSR”). Relative TSR reflects the change in the value of the Company’s common stock over the performance period in relation to the change in the value of the common stock of a twelve-company executive compensation peer group over the performance period, assuming the reinvestment of dividends. Depending on the results achieved during the three-year performance periods, the actual number of shares that a grant recipient receives at the end of the period may range from 0% to 150% of the Target Shares granted.

Also during 2016, 2015 and 2014, the CMD Committee approved awards of time-based restricted stock units to certain senior executives and other employees of the Company and awards of time-based restricted stock units to the non-employee members of the Company’s board of directors.

Stock Options

The fair value of stock options granted during 2016, 2015 and 2014 and the weighted average assumptions used to estimate the fair value are as follows:



	2016			2015			2014
Weighted average grant date fair value of stock options granted during the period	$	12.14		$	20.78		$	19.07
Dividend yield	3.8		%	2.7		%	2.5		%
Expected volatility	42.7		%	43.3		%	42.7		%
Risk-free interest rate	1.4		%	1.7		%	1.5		%
Expected life	5.7 years			5.7 years			5.7 years

The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The Company estimates the expected volatility and expected option life assumption consistent with ASC Topic 718, “Compensation – Stock Compensation.” The expected volatility of the Company’s common stock at the date of grant is estimated based on a historic volatility rate and the expected option life is calculated based on historical stock option experience as the best estimate of future exercise patterns. The dividend yield assumption is based on historical and anticipated dividend payouts. The risk-free interest rate assumption is based on observed interest rates consistent with the expected life of each stock option grant. The Company uses historical data to estimate pre-vesting option forfeitures and records stock-based compensation expense only for those awards that are expected to vest. Compensation expense is recorded for all stock options expected to vest based on the amortization of the fair value at the date of grant on a straight-line basis primarily over the vesting period of the options.

Activity related to stock options for 2016 is as follows:



	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life	Aggregate Intrinsic Value
	(thousands)				(years)	(millions)
Outstanding, beginning of period	18,829.8		$	41.92
Granted	3,886.8		$	42.97
Canceled or forfeited	(1,116.6	)	$	51.33
Exercised	(1,122.1	)	$	31.30
Outstanding, end of period	20,477.9		$	42.18
Exercisable, end of period	12,541.5		$	36.48	4.1	$	46
Options expected to vest	6,657.5		$	51.07	8.3	$	—

Additional information relating to stock options is as follows:



	2016		2015		2014
	(millions)
Intrinsic value of options exercised	$	12	$	127	$	189
Cash received from stock options exercised	35		125		200

Restricted Stock Units

The weighted average grant date fair values of restricted stock units granted during 2016, 2015 and 2014 are as follows:



	2016		2015		2014
Restricted stock units	$	40.02	$	62.61	$	59.41

The fair value of the Target Shares and restricted stock awards are based on the fair value of the underlying shares on the date of grant. The fair value of the portion of the Target Shares that relate to a relative TSR performance objective was determined using a Monte Carlo simulation analysis to estimate the total shareholder return ranking of the Company among a twelve-company executive compensation peer group over the remaining performance periods. The expected volatility of the Company’s common stock at the date of grant was estimated based on a historical average volatility rate for the approximate three-year performance period. The dividend yield assumption was based on historical and anticipated dividend payouts. The risk-free interest rate assumption was based on observed interest rates consistent with the approximate three-year performance measurement period.

Compensation expense is recorded for all restricted stock unit awards based on the amortization of the fair market value at the date of grant over the period the restrictions lapse or over the performance period of the performance-based restricted stock units.

Activity related to restricted stock units for 2016 is as follows:



	Shares		Weighted Average Grant Date Fair Value
	(thousands)
Nonvested, beginning of period	1,497.0		$	57.06
Granted – performance-based	575.1		43.72
Performance adjustment	(237.6	)	59.82
Granted – time-based	482.8		35.61
Forfeited	(250.0	)	32.99
Vested	(249.0	)	33.70
Nonvested, end of period	1,818.3		$	53.29