NOTE 2 — SHARE-BASED COMPENSATION

Stock Incentive Plan

Our stock incentive plan is designed to promote the long term financial interests and growth of the Company by attracting and retaining management and other personnel, motivating them to achieve long range goals and aligning their interests with those of our stockholders through opportunities for increased stock, or stock-based, ownership in the Company. The stock options, stock appreciation rights (“SARs”) and restricted share units (“RSUs”) granted vest solely based upon continued employment over a specific period of time, and the performance share units (“PSUs”) vest based upon both continued employment over a specific period of time and the achievement of predetermined financial targets over time. At December 31, 2018, there were 21,162 thousand shares available for future grants under the stock incentive plan.

Employee Stock Purchase Plan

Our employee stock purchase plan (“ESPP”) provides our participating employees an opportunity to obtain shares of our common stock at a discount (through payroll deductions over three-month periods). At December 31, 2018, 7,827 thousand shares of common stock were reserved for issuance under the ESPP provisions. During 2018 and 2017, the Company recognized $10 million and $9 million, respectively, of compensation expense related to the ESPP.

Stock Option, SAR, RSU and PSU Activity

The fair value of each stock option and SAR award is estimated on the grant date, using valuation models and the weighted average assumptions indicated in the following table. Awards under our stock incentive plan generally vest based on continued employment (“Time Stock Options and SARs” and “Time RSUs”) and based upon continued employment and the achievement of certain financial targets (“Performance Stock Options and SARs”, “Performance RSUs” and “PSUs”). PSUs have a three-year cumulative earnings per share target, and the number of PSUs earned can vary from zero (for actual performance of less than 80% of target) to two times the original PSU grant (for actual performance of 120% or more of target). Each grant is valued as a single award with an expected term equal to the average expected term of the component vesting tranches. We use historical exercise behavior data and other factors to estimate the expected term of the options and SARs. The expected term of the share-based award is limited by the contractual term, and employee post-vesting termination behavior is incorporated in the historical exercise behavior data.

Compensation cost is recognized on the straight-line attribution method. The straight-line attribution method requires that total compensation expense recognized must at least equal the vested portion of the grant-date fair value. The expected volatility is derived using historical stock price information for our common stock and the volatility implied by the trading of options to purchase our stock on open-market exchanges. The risk-free interest rate is the approximate yield on United States Treasury Strips having a life equal to the expected share-based award life on the date of grant. The expected life is an estimate of the number of years a share-based award will be held before it is exercised. The expected dividend yield is estimated based on the assumption that the dividend yield at date of grant will be maintained over the expected life of the grant.


	2018			2017			2016
Risk-free interest rate		2.62	%		2.13	%		1.70	%
Expected volatility		29	%		31	%		36	%
Expected life, in years		6.15			6.17			6.25
Expected dividend yield		1.37	%		—			—

Information regarding Time Stock Options and SARs and Performance Stock Options and SARs activity during 2018, 2017 and 2016 is summarized below (share amounts in thousands):


	Time Stock Options and SARs			Performance Stock Options and SARs			Total Stock Options and SARs			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value (dollars in millions)
Options and SARs outstanding, December 31, 2015		12,165			10,427			22,592		$	27.73
Granted		1,601			—			1,601			69.96
Exercised		(2,521	)		(4,171	)		(6,692	)		15.85
Cancelled		(309	)		(126	)		(435	)		55.17

Options and SARs outstanding, December 31, 2016		10,936			6,130			17,066			35.65
Granted		1,879			—			1,879			81.83
Exercised		(1,549	)		(1,366	)		(2,915	)		21.49
Cancelled		(110	)		(178	)		(288	)		52.92

Options and SARs outstanding, December 31, 2017		11,156			4,586			15,742			43.47
Granted		2,342			—			2,342			101.96
Exercised		(3,917	)		(1,774	)		(5,691	)		27.86
Cancelled		(221	)		(145	)		(366	)		68.43

Options and SARs outstanding, December 31, 2018		9,360			2,667			12,027		$	61.49		6.1 years	$	758

Options and SARs exercisable, December 31, 2018		4,720			2,667			7,387		$	44.17		4.7 years	$	593

The weighted average fair values of stock options and SARs granted during 2018, 2017 and 2016 were $28.90, $28.47 and $26.60 per share, respectively. The total intrinsic value of stock options and SARs exercised during 2018, 2017 and 2016 was $456 million, $177 million and $398 million, respectively. The total fair value of RSUs and PSUs that vested during 2018, 2017 and 2016 was $413 million, $188 million and $216 million, respectively. As of December 31, 2018, the unrecognized compensation cost related to nonvested stock options and SARs was $89 million.

Information regarding Time RSUs, Performance RSUs and PSUs activity during 2018, 2017 and 2016 is summarized below (share amounts in thousands):


	Time RSUs			Performance RSUs			PSUs			Total RSUs and PSUs			Weighted Average Grant Date Fair Value
RSUs and PSUs outstanding, December 31, 2015		5,302			1,740			1,371			8,413		$	51.15
Granted		1,450			—			1,178			2,628			69.95
Vested		(2,242	)		(870	)		—			(3,112	)		41.71
Cancelled		(399	)		(80	)		(163	)		(642	)		59.66

RSUs and PSUs outstanding, December 31, 2016		4,111			790			2,386			7,287			61.21
Granted		1,484			—			1,304			2,788			81.90
Vested		(1,824	)		(430	)		—			(2,254	)		51.20
Cancelled		(306	)		(133	)		(128	)		(567	)		64.06

RSUs and PSUs outstanding, December 31, 2017		3,465			227			3,562			7,254			72.05
Granted		1,464			—			1,261			2,725			101.85
Performance adjustment		—			—			1,250			1,250			69.27
Vested		(1,487	)		(136	)		(2,500	)		(4,123	)		67.33
Cancelled		(319	)		(91	)		(151	)		(561	)		78.82

RSUs and PSUs outstanding, December 31, 2018		3,123			—			3,422			6,545		$	86.32

As of December 31, 2018, the unrecognized compensation cost related to RSUs and PSUs was $304 million.