Share-Based Compensation Plans

The Company has share-based compensation plans under which the Company grants restricted stock units (RSUs) and performance share units (PSUs) to certain management level employees. In addition, employees and non-employee directors may be granted options to purchase shares of Company common stock at the fair market value at the time of grant. These plans were approved by the Company’s shareholders.

At December 31, 2018, 111 million shares collectively were authorized for future grants under the Company’s share-based compensation plans. These awards are settled primarily with treasury shares.

Employee stock options are granted to purchase shares of Company stock at the fair market value at the time of grant. These awards generally vest one-third each year over a three-year period, with a contractual term of 7-10 years. RSUs are stock awards that are granted to employees and entitle the holder to shares of common stock as the awards vest. The fair value of the stock option and RSU awards is determined and fixed on the grant date based on the Company’s stock price. PSUs are stock awards where the ultimate number of shares issued will be contingent on the Company’s performance against a pre-set objective or set of objectives. The fair value of each PSU is determined on the date of grant based on the Company’s stock price. For RSUs and PSUs, dividends declared during the vesting period are payable to the employees only upon vesting. Over the PSU performance period, the number of shares of stock that are expected to be issued will be adjusted based on the probability of achievement of a performance target and final compensation expense will be recognized based on the ultimate number of shares issued. RSU and PSU distributions will be in shares of Company stock after the end of the vesting or performance period, subject to the terms applicable to such awards. PSU awards generally vest after three years. Prior to 2018, RSU awards generally vested after three years; beginning with awards granted in 2018, RSU awards generally vest one-third each year over a three-year period.

Total pretax share-based compensation cost recorded in 2018, 2017 and 2016 was $348 million, $312 million and $300 million, respectively, with related income tax benefits of $55 million, $57 million and $92 million, respectively.

The Company uses the Black-Scholes option pricing model for determining the fair value of option grants. In applying this model, the Company uses both historical data and current market data to estimate the fair value of its options. The Black-Scholes model requires several assumptions including expected dividend yield, risk-free interest rate, volatility, and term of the options. The expected dividend yield is based on historical patterns of dividend payments. The risk-free rate is based on the rate at grant date of zero-coupon U.S. Treasury Notes with a term equal to the expected term of the option. Expected volatility is estimated using a blend of historical and implied volatility. The historical component is based on historical monthly price changes. The implied volatility is obtained from market data on the Company’s traded options. The expected life represents the amount of time that options granted are expected to be outstanding, based on historical and forecasted exercise behavior.

The weighted average exercise price of options granted in 2018, 2017 and 2016 was $58.15, $63.88 and $54.63 per option, respectively. The weighted average fair value of options granted in 2018, 2017 and 2016 was $8.26, $7.04 and $5.89 per option, respectively, and were determined using the following assumptions:



Years Ended December 31	2018		2017		2016
Expected dividend yield	3.4	%	3.6	%	3.8	%
Risk-free interest rate	2.9	%	2.0	%	1.4	%
Expected volatility	19.1	%	17.8	%	19.6	%
Expected life (years)	6.1		6.1		6.2

Summarized information relative to stock option plan activity (options in thousands) is as follows:



	Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
Outstanding January 1, 2018	36,274		$	46.77
Granted	3,520		58.15
Exercised	(14,598	)	40.51
Forfeited	(1,389	)	53.80
Outstanding December 31, 2018	23,807		$	51.89	5.95	$	584
Exercisable December 31, 2018	16,184		$	48.85	4.82	$	446

Additional information pertaining to stock option plans is provided in the table below:



Years Ended December 31	2018		2017		2016
Total intrinsic value of stock options exercised	$	348	$	236	$	444
Fair value of stock options vested	29		30		28
Cash received from the exercise of stock options	591		499		939

A summary of nonvested RSU and PSU activity (shares in thousands) is as follows:



	RSUs				PSUs
	Number of Shares		Weighted Average Grant Date Fair Value		Number of Shares		Weighted Average Grant Date Fair Value
Nonvested January 1, 2018	13,609		$	59.32	1,868		$	60.03
Granted	7,270		58.46		1,081		57.17
Vested	(3,766	)	59.66		(758	)	57.59
Forfeited	(985	)	59.30		(152	)	60.06
Nonvested December 31, 2018	16,128		$	58.85	2,039		$	59.42

At December 31, 2018, there was $560 million of total pretax unrecognized compensation expense related to nonvested stock options, RSU and PSU awards which will be recognized over a weighted average period of 1.9 years. For segment reporting, share-based compensation costs are unallocated expenses.