Employee Benefit Plans

A. Stock-based Compensation Plans

Stock-based compensation consists of the following:

•

Stock Options. Stock options are granted to employees at exercise prices equal to the fair market value of the Company's common stock on the dates of grant. Stock options are issued under a graded vesting schedule and have a term of 10 years. Options granted prior to July 1, 2008 generally vest ratably over five years and options granted after July 1, 2008 generally vest ratably over four years. Compensation expense is measured based on the fair value of the stock option on the grant date and recognized over the requisite service period for each separately vesting portion of the stock option award. Stock options are forfeited if the employee ceases to be employed by the Company prior to vesting.


•	Restricted Stock


•	Time-Based Restricted Stock and Time-Based Restricted Stock Units. Time-based restricted stock and time-based restricted stock units granted prior to fiscal 2013 are subject to vesting periods of up to five years and awards granted in fiscal 2013 and later are subject to a vesting period of two years. Awards are forfeited if the employee ceases to be employed by the Company prior to vesting.

Time-based restricted stock cannot be transferred during the vesting period. Compensation expense relating to the issuance of time-based restricted stock is measured based on the fair value of the award on the grant date and recognized on a straight-line basis over the vesting period. Dividends are paid on shares awarded under the time-based restricted stock program.

Time-based restricted stock units are settled in cash and cannot be transferred during the vesting period. Compensation expense relating to the issuance of time-based restricted stock units is recorded over the vesting period and is initially based on the fair value of the award on the grant date; and is subsequently remeasured at each reporting date during the vesting period. No dividend equivalents are paid on units awarded under the time-based restricted stock unit program.

•

Performance-Based Restricted Stock and Performance-Based Restricted Stock Units. Performance-based restricted stock and performance-based restricted stock units generally vest over a one to three year performance period and a subsequent service period of up to 26 months. Under these programs, the Company communicates "target awards" at the beginning of the performance period with possible payouts at the end of the performance period ranging from 0% to 150% of the "target awards." Awards are forfeited if the employee ceases to be employed by the Company prior to vesting.

Performance-based restricted stock cannot be transferred during the vesting period. Compensation expense relating to the issuance of performance-based restricted stock is recognized over the vesting period based on the fair value of the award on the grant date with subsequent adjustments to the number of shares awarded during the performance period based on probable and actual performance against targets. After the performance period, if the performance targets are achieved, employees are eligible to receive dividends during the remaining vesting period on shares awarded under the performance-based restricted stock program.

Performance-based restricted stock units are settled in either cash or stock, depending on the employee's home country, and cannot be transferred during the vesting period. Compensation expense relating to the issuance of performance-based restricted stock units settled in cash is recognized over the vesting period initially based on the fair value of the award on the grant date with subsequent adjustments to the number of units awarded during the performance period based on probable and actual performance against targets. In addition, compensation expense is remeasured at each reporting period during the vesting period based on the change in the Company's stock price. Compensation expense relating to the issuance of performance-based restricted stock units settled in stock is recorded over the vesting period based on the fair value of the award on the grant date with subsequent adjustments to the number of units awarded based on the probable and actual performance against targets. Dividend equivalents are paid on awards settled in stock under the performance-based restricted stock unit program.


•	Employee Stock Purchase Plan. The Company offers an employee stock purchase plan that allows eligible employees to purchase shares of common stock at a price equal to 95% of the market value for the Company's common stock on the last day of the offering period. This plan has been deemed non-compensatory and, therefore, no compensation expense has been recorded.

The Company currently utilizes treasury stock to satisfy stock option exercises, issuances under the Company's employee stock purchase plan, and restricted stock awards. From time to time, the Company may repurchase shares of its common stock under its authorized share repurchase programs. The Company repurchased 4.2 million shares in the three months ended September 30, 2015 as compared to 0.6 million shares repurchased in the three months ended September 30, 2014. The Company considers several factors in determining when to execute share repurchases, including, among other things, actual and potential acquisition activity, cash balances and cash flows, issuances due to employee benefit plan activity, and market conditions.

The following table represents stock-based compensation expense and related income tax benefits for the three months ended September 30, 2015 and 2014, respectively:



	Three Months Ended
	September 30,
	2015		2014
Operating expenses	$	5.9	$	7.5
Selling, general and administrative expenses	24.3		25.6
System development and programming costs	4.5		5.6
Total pre-tax stock-based compensation expense	$	34.7	$	38.7

Income tax benefit	$	12.6	$	13.9

Stock-based compensation expense attributable to employees of the discontinued operations are included in discontinued operations in the Statements of Consolidated Earnings, and therefore not presented in the table above. For the three months ended September 30, 2014, such stock-based compensation expense was $5.2 million.

As a result of the spin-off of CDK, the number of vested and unvested ADP stock options, their strike price, and the number of unvested performance-based and time-based restricted shares and units were adjusted to preserve the intrinsic value of the awards immediately prior to the spin-off using an adjustment ratio based on the market close price of ADP stock prior to the spin-off and the market open price of ADP stock subsequent to the spin-off. Since these adjustments were considered to be a modification of the awards in accordance to ASC 718, "Stock Compensation," the Company compared the fair value of the awards immediately prior to the spin-off to the fair value immediately after the spin-off to measure potential incremental stock-based compensation expense, if any. The adjustments did not result in an increase in the fair value of the awards and, accordingly, the Company did not record incremental stock-based compensation expense. Unvested ADP stock options, unvested restricted stock, and unvested restricted stock units held by CDK employees were replaced by CDK awards immediately following the spin-off. The stock-based compensation expense associated with the original grant of ADP awards to remaining ADP employees will continue to be recognized within earnings from continuing operations in the Company's Statements of Consolidated Earnings.

As of September 30, 2015, the total remaining unrecognized compensation cost related to non-vested stock options, restricted stock units, and restricted stock awards amounted to $24.5 million, $33.1 million, and $166.2 million, respectively, which will be amortized over the weighted-average remaining requisite service periods of 2.1 years, 1.6 years, and 1.7 years, respectively.

During the three months ended September 30, 2015, the following activity occurred under the Company’s existing plans:

Stock Options:



	Number of Options (in thousands)		Weighted Average Price (in dollars)
Options outstanding at July 1, 2015	5,888		$	55
Options granted	1,138		$	75
Options exercised	(321	)	$	37
Options canceled	(80	)	$	69
Options outstanding at September 30, 2015	6,625		$	59

Time-Based Restricted Stock and Time-Based Restricted Stock Units:



	Number of Shares (in thousands)		Number of Units (in thousands)
Restricted shares/units outstanding at July 1, 2015	2,137		486
Restricted shares/units granted	951		237
Restricted shares/units vested	(1,109	)	(245	)
Restricted shares/units forfeited	(41	)	(16	)
Restricted shares/units outstanding at September 30, 2015	1,938		462

Performance-Based Restricted Stock and Performance-Based Restricted Stock Units:



	Number of Shares (in thousands)		Number of Units (in thousands)
Restricted shares/units outstanding at July 1, 2015	903		534
Restricted shares/units granted	286		302
Restricted shares/units vested	(540	)	(37	)
Restricted shares/units forfeited	(22	)	(19	)
Restricted shares/units outstanding at September 30, 2015	627		780

The fair value of each stock option issued is estimated on the date of grant using a binomial option pricing model. The binomial model considers a range of assumptions related to volatility, risk-free interest rate, and employee exercise behavior. Expected volatilities utilized in the binomial model are based on a combination of implied market volatilities, historical volatility of the Company’s stock price, and other factors. Similarly, the dividend yield is based on historical experience and expected future changes. The risk-free rate is derived from the U.S. Treasury yield curve in effect at the time of grant. The binomial model also incorporates exercise and forfeiture assumptions based on an analysis of historical data. The expected life of the stock option grant is derived from the output of the binomial model and represents the period of time that options granted are expected to be outstanding.

The fair value for stock options granted was estimated at the date of grant using the following assumptions:



	Three Months Ended
	September 30,
	2015			2014
Risk-free interest rate	1.6		%	1.9		%
Dividend yield	2.6		%	2.3		%
Weighted average volatility factor	25.6		%	22.8		%
Weighted average expected life (in years)	5.4			5.4
Weighted average fair value (in dollars) (A)	$	13.16		$	12.45

(A) The weighted average fair values of grants issued before September 30, 2014 were adjusted to reflect the impact of the spin-off of CDK.

B. Pension Plans

The components of net pension expense were as follows:



	Three Months Ended
	September 30,
	2015			2014
Service cost – benefits earned during the period	$	17.6		$	19.2
Interest cost on projected benefits	16.9			15.8
Expected return on plan assets	(32.9		)	(32.5		)
Net amortization and deferral	2.8			4.4
Curtailments and special termination benefits	—			3.2
Net pension expense	$	4.4		$	10.1

Net pension expense for the three months ended September 30, 2014 includes $4.3 million reported within earnings from discontinued operations on the Statements of Consolidated Earnings. Included within pension expense related to discontinued operations for the three months ended September 30, 2014 were total one-time charges of $3.2 million for curtailment charges and special termination benefits directly attributable to the spin-off of CDK.