Employee Stock-based Compensation Plans

The Company recorded stock-based compensation expense for the years ended December 31 as follows:



In millions	2014			2013			2012
Stock options	$	13		$	14		$	15
Restricted stock	33			32			28
Employee share repurchase program (compensatory effective 1/1/13)	4			3			—
Total stock-based compensation before income taxes	50			49			43
Tax benefit	(16		)	(16		)	(14		)
Total stock-based compensation, net of tax	$	34		$	33		$	29

The Teradata Corporation 2007 Stock Incentive Plan (the “2007 SIP”), as amended, and the Teradata 2012 Stock Incentive Plan (the “2012 SIP”) provide for the grant of several different forms of stock-based compensation. The 2012 SIP was adopted and approved by stockholders in April 2012 and no further awards may be made under the 2007 SIP after that time. A total of approximately 16.4 million shares were authorized to be issued under the 2012 SIP. New shares of the Company’s common stock are issued as a result of the vesting of restricted stock units and stock option exercises, and at the time of grant for restricted stock, for awards under both plans.

As of December 31, 2014, the Company’s primary types of stock-based compensation were stock options, restricted stock, restricted stock units and the employee stock purchase program (the “ESPP”).

Stock Options

The Compensation and Human Resource Committee of Teradata’s Board of Directors had discretion to determine the material terms and conditions of option awards under both the 2007 SIP and the 2012 SIP (collectively, the “Teradata SIP”), provided that (i) the exercise price must be no less than the fair market value of Teradata common stock (as defined in both plans) on the date of grant, and (ii) the term must be no longer than ten years. Option grants generally have a four-year vesting period.

For the years ended December 31, 2014, 2013 and 2012, the weighted-average fair value of options granted for Teradata equity awards was $17.67, $18.02 and $22.31, respectively. The fair value of each option award on the grant date was estimated using the Black-Scholes option-pricing model with the following assumptions:



	2014		2013		2012
Dividend yield	—	%	—	%	—	%
Risk-free interest rate	1.73	%	1.77	%	0.87	%
Expected volatility	37.8	%	37.6	%	35.7	%
Expected term (years)	6.3		6.3		6.3

In 2014, the expected volatility was based on Teradata's historical volatility. Prior to 2014, the expected volatility assumption was based on a blend of peer group volatility and Teradata volatility. The expected term assumption is determined using the simplified method under GAAP, which is based on the vesting period and contractual term for each vesting tranche of awards. The mid-point between the vesting date and the expiration date is used as the expected term under this method. The risk-free interest rate for periods within the contractual life of the option is based on an average of the five-year and seven-year U.S. Treasury yield curve in effect at the time of grant.

The following table summarizes the Company’s stock option activity for the year ended December 31, 2014:



Shares in thousands	Shares Under Option		Weighted- Average Exercise Price per Share		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in millions)
Outstanding at January 1, 2013	7,012		$	33.27	6.3	$	100
Granted	921		$	44.43
Exercised	(561	)	$	19.02
Canceled	(36	)	$	41.83
Forfeited	(99	)	$	50.98
Outstanding at December 31, 2014	7,237		$	35.50	6.1	$	78
Fully vested and expected to vest at December 31, 2014	7,194		$	35.44	6.0	$	78
Exercisable at December 31, 2014	5,190		$	30.63	4.9	$	78

The following table summarizes the total intrinsic value of options exercised and the cash received by the Company from option exercises under all share-based payment arrangements at December 31:



In millions	2014		2013		2012
Intrinsic value of options exercised	$	14	$	19	$	113
Cash received from option exercises	$	11	$	9	$	43
Tax benefit realized from option exercises	$	5	$	6	$	38

As of December 31, 2014, there was $37 million of total unrecognized compensation cost related to unvested stock option grants. That cost is expected to be recognized over a weighted-average period of 3.1 years.

Restricted Stock and Restricted Stock Units

The Teradata SIP provides for the issuance of restricted stock, as well as restricted stock units. These grants consist of both service-based and performance-based awards. Service-based awards typically vest over a three-to four-year period beginning on the effective date of grant. These grants are not subject to future performance measures. The cost of these awards, determined to be the fair market value at the date of grant, is expensed ratably over the vesting period. For substantially all restricted stock grants, at the date of grant, the recipient has all rights of a stockholder, subject to certain restrictions on transferability and a risk of forfeiture. A recipient of restricted stock units does not have the rights of a stockholder and is subject to restrictions on transferability and risk of forfeiture. For both restricted stock grants and restricted stock units, any potential dividend rights would be subject to the same vesting requirements as the underlying equity award. As a result, such rights are considered a contingent transfer of value and consequently these equity awards are not considered participating securities. Performance-based grants are subject to future performance measurements over a one-to four-year period. All performance-based shares that are earned in respect of an award will become vested at the end of the performance and/or service period provided the employee is continuously employed by the Company and applicable performance measures are met. The fair value of each performance-based award is determined on the grant date, based on the Company’s stock price, and assumes that performance targets will be achieved. Over the performance period, the number of shares of stock that will be issued is adjusted upward or downward based upon management’s assessment of the probability of achievement of performance targets. The ultimate number of shares issued and the related compensation cost recognized as expense will be based on a comparison of the final achievement of performance metrics to the specified targets.

The following table reports restricted stock and restricted stock unit activity during the year ended December 31, 2014:



Shares in thousands	Number of Shares		Weighted- Average Grant Date Fair Value per Share
Unvested shares at January 1, 2014	2,578		$	50.30
Granted	1,447		$	44.39
Vested	(537	)	$	50.91
Forfeited/canceled	(236	)	$	54.17
Unvested shares at December 31, 2014	3,252		$	47.18

The following table summarizes the weighted-average fair value of restricted stock units granted for Teradata equity awards and the total fair value of shares vested at December 31:



	2014		2013		2012
Weighted-average fair value of restricted stock units granted	$	44.39	$	48.24	$	60.71
Total fair value of shares vested (in millions)	$	27	$	30	$	15

As of December 31, 2014, there was $87 million of unrecognized compensation cost related to unvested restricted stock grants. The unrecognized compensation cost is expected to be recognized over a remaining weighted-average period of 2.4 years.

The following table represents the composition of Teradata restricted stock unit grants in 2014:



Shares in thousands	Number of Shares	Weighted- Average Grant Date Fair Value
Service-based shares	1,361	$	44.28
Performance-based shares	86	$	46.26
Total stock grants	1,447	$	44.39

Approximately 0.3 million shares of the performance awards issued in December of 2012 also included a market-based component for certain key executives in connection with a restructuring of the Company’s management team. On March 1, 2013, these awards were amended to create two separate awards: (i) 70% of the units were allocated to 2016 performance-based restricted share units (“Special 2016 PBRSUs”); and (ii) 30% of the units were allocated to special long-term strategic performance-based restricted share units (“Long-Term Strategic PBRSUs”). This modification resulted in no incremental fair value on the date of modification. Consistent with a Type I modification, the original fair value was used to value the awards since the stock price and fair value was lower on the date of modification. Each recipient’s opportunity to earn the Special 2016 PBRSUs is based on the extent to which Teradata achieves certain challenging or “stretch” financial goals through 2016 based on a GAAP revenue and a non-GAAP earnings per share targets in 2016. Each recipient’s opportunity to earn the Long-Term Strategic PBRSUs generally is based on a subjective assessment of performance over a four-year period ending in 2016 relative to a mix of long-term strategic measures with respect to such matters as data warehousing technology and offerings and integrated marketing management solutions, among other things, provided that a stretch non-GAAP earnings per share threshold is achieved. There was no compensation expense related to the Special 2016 PBRSUs and Long-Term Strategic PBRSUs recorded in 2014 based on management’s determination that at December 31, 2014 it was not probable that performance targets for these awards would be achievable.

For the Special 2016 PBRSUs, payout in excess of target cannot occur unless the Company achieves certain non-GAAP earnings per share and stock price goals. In evaluating the fair value of the Special 2016 PBRSUs, the Company used a Monte Carlo simulation on the grant date and determined the fair value to be $26.78 per unit for the market component of the award. Compensation expense related to the performance portion of the award is valued based on the grant date stock price and is only recorded in a period when it is probable that the performance metrics will be met. Compensation expense related to the market portion is only recorded when it is probable that the performance metrics will be above target, regardless of the stock price. There was no compensation expense related to the market portion of these awards in 2014. The primary assumptions used in the valuation of the market component of the awards were as follows:



	2012
Grant date fair value per share of Company common stock	$	58.63
Expected volatility	36.44		%
Risk-free interest rate	0.47		%
Dividend yield	—
Performance vesting hurdle - future fair value per share of Company common stock	$	85.00

Employee Stock Purchase Program

The Company’s ESPP, effective on October 1, 2007, and as amended effective as of January 1, 2013, provides eligible employees of Teradata and its designated subsidiaries an opportunity to purchase the Company’s common stock at a discount to the average of the highest and lowest sale prices on the last trading day of each month. As of January 1, 2013, the ESPP discount was 15% of the average market price and considered compensatory. Prior to 2013, the ESPP discount was 5% of the average market price and this plan was considered non-compensatory.

Employees may authorize payroll deductions of up to 10% of eligible compensation for common stock purchases. A total of 4 million shares were authorized to be issued under the ESPP, with approximately 1.9 million shares remaining under that authorization at December 31, 2014. The shares of Teradata common stock purchased by a participant on an exercise date (the last day of each month), for all purposes, are deemed to have been issued and sold at the close of business on such exercise date. Prior to that time, none of the rights or privileges of a stockholder exists with respect to such shares. Employee purchases and aggregate cost were as follows at December 31:



In millions	2014		2013		2012
Employee share purchases	0.4		0.4		0.2
Aggregate cost	$	18	$	20	$	12