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Stock-based Compensation Expense
 12 Months Ended
Dec. 31, 2021
Share-based Payment Arrangement [Abstract]  
Stock-based Compensation Expense Stock-based Compensation ExpenseWe recognize share-based payments to employees as compensation expense using the fair value method. The fair value of stock options and shares purchased pursuant to the ESPP is calculated using the Black-Scholes option pricing model. The fair value of restricted stock units, including PSUs, is based on the intrinsic value on the date of grant. Stock-based compensation, measured at the grant date based on the fair value of the award, is typically recognized as expense ratably over the requisite service period.
The effect of stock-based compensation expense during the three years ended December 31, 2021 was as follows:
202120202019
(in millions)
Stock-based compensation expense by line item:
Cost of sales$6.3 $5.6 $5.6 
Research and development expenses268.3 262.7 224.6 
Selling, general and administrative expenses
166.8 161.2 130.3 
Total stock-based compensation expense included in costs and expenses
441.4 429.5 360.5 
Income tax effect(82.9)(147.0)(124.2)
Total stock-based compensation included in costs and expenses, net of tax$358.5 $282.5 $236.3 
The stock-based compensation expense by type of award during the three years ended December 31, 2021 was as follows:
202120202019
(in millions)
Stock-based compensation expense by type of award:
Restricted stock units (including PSUs)$384.3 $360.4 $254.3 
Stock options36.8 59.7 96.7 
ESPP share issuances24.4 13.0 11.2 
Stock-based compensation expense related to inventories(4.1)(3.6)(1.7)
Total stock-based compensation expense included in costs and expenses
$441.4 $429.5 $360.5 
We capitalize a portion of our stock-based compensation expense to inventories, all of which is attributable to employees who support the manufacturing of our products.
The following table sets forth our unrecognized stock-based compensation expense as of December 31, 2021, by type of award and the weighted-average period over which that expense is expected to be recognized:
As of December 31, 2021
Unrecognized Expense
Weighted-average Recognition Period
(in millions)(in years)
Type of award:
Restricted stock units (including PSUs)$423.3 1.91
Stock options19.1 1.09
ESPP share issuances12.6 0.54
Total unrecognized stock-based compensation expense$455.0 
Stock Options
In each of the three years ended December 31, 2021, we issued stock options to our non-employee directors. In 2019, we issued stock options with service conditions, which were generally the vesting periods of the awards, to our employees. We use the Black-Scholes option pricing model to estimate the fair value of stock options at the grant date. The Black-Scholes option pricing model uses the option exercise price as well as estimates and assumptions related to the expected price volatility of our stock, the rate of return on risk-free investments, the expected period during which the options will be outstanding, and the expected dividend yield for our stock to estimate the fair value of a stock option on the grant date. The
options granted during 2021, 2020 and 2019 had a weighted-average grant-date fair value per share of $65.94, $88.37 and $61.32, respectively.
The fair value of each option granted during 2021, 2020 and 2019 was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
202120202019
Stock options granted27,30222,6361,520,743
Expected stock price volatility35.03%35.87%36.99%
Risk-free interest rate0.86%0.43%2.32%
Expected term of options (in years)4.504.674.27
Expected annual dividends———
The weighted-average valuation assumptions were determined as follows:
•Expected stock price volatility: Expected stock price volatility is calculated using the trailing one-month average of daily implied volatilities prior to the grant date. Implied volatility is based on options to purchase our stock with remaining terms of greater than one year that are regularly traded in the market.
•Risk-free interest rate: We base the risk-free interest rate on the interest rate payable on U.S. Treasury securities in effect at the time of grant for a period that is commensurate with the assumed expected option term.
•Expected term of options: The expected term of options represents the period of time options are expected to be outstanding. We use historical data to estimate employee exercise and post-vest termination behavior. We believe that all groups of employees exhibit similar exercise and post-vest termination behavior and therefore do not stratify employees into multiple groups in determining the expected term of options.
•Expected annual dividends: The estimate for annual dividends is $0.00 because we have not historically paid, and do not intend for the foreseeable future to pay, a dividend.
Restricted Stock Units and Performance-based Restricted Stock Units
We award restricted stock units with service conditions, which are generally the vesting periods of the awards.
We grant PSUs to certain members of senior management. Half of the PSUs contain financial goals as the performance metric and the other half contain non-financial goals. A target number of shares is established for each award; however, the actual number of shares that are issued when an award vests may range from zero to 200% of the target amount depending upon the level of achievement of the applicable performance metric. The financial-based PSUs vest in three equal installments over a three-year period and are expensed ratably over that same period based upon an assessment of the likely level of achievement. The non-financial based PSUs cliff vest at the end of the three-year performance period and are expensed on a straight-line basis over that same period based upon an assessment of the likely level of achievement.
Employee Stock Purchase Plan
The weighted-average fair value of each purchase right granted during 2021, 2020 and 2019 was $51.71, $65.88 and $47.79, respectively. The following table reflects the weighted-average assumptions used in the Black-Scholes option pricing model for 2021, 2020 and 2019:
202120202019
Expected stock price volatility34.06%37.70%33.43%
Risk-free interest rate0.05%0.11%2.08%
Expected term (in years)0.690.710.74
Expected annual dividends———
The weighted-average assumptions used in our Black-Scholes option pricing model were determined utilizing calculations similar to those described under Stock Options above.