Share-based Compensation

12 Months Ended

Dec. 31, 2020

Share-based Payment Arrangement [Abstract]


Share-based Compensation

The Company maintains a share-based compensation plan, which authorizes the granting of various equity-based incentives including stock options and RSUs to employees and nonemployee directors. The number of shares of common stock reserved for issuance under the plan was 39.3 million at December 31, 2020, including 24.6 million available for future grants.

Share-based compensation expense and the effect on diluted earnings per common share were as follows:


In millions, except per share data	2020		2019		2018
Share-based compensation expense	$	92.4	$	109.6	$	125.1
After tax	$	78.3	$	94.2	$	108.1
Earnings per common share-diluted	$	0.10	$	0.12	$	0.14

As of December 31, 2020, there was $121.5 million of total unrecognized compensation cost related to nonvested share-based compensation that is expected to be recognized over a weighted-average period of 2.0 years.

STOCK OPTIONS

Stock options to purchase common stock are granted with an exercise price equal to the closing market price of the Company’s stock on the date of grant. Substantially all of the options become exercisable in four equal installments, beginning a year from the date of the grant, and generally expire 10 years from the grant date.

The following table presents the weighted-average assumptions used in the option pricing model for the 2020, 2019 and 2018 stock option grants. The expected life of the options represents the period of time the options are expected to be outstanding and is based on historical trends. Expected stock price volatility is generally based on the historical volatility of the Company’s stock for a period approximating the expected life. The expected dividend yield is based on the Company’s most recent annual dividend rate. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant with a term equal to the expected life.

Weighted-average assumptions


	2020			2019			2018
Expected dividend yield	2.3		%	2.7		%	2.6		%
Expected stock price volatility	19.1		%	18.9		%	18.7		%
Risk-free interest rate	1.4		%	2.5		%	2.7		%
Expected life of options (in years)	5.7			5.8			5.8
Fair value per option granted	$	29.40		$	25.60		$	23.80

Intrinsic value for stock options is defined as the difference between the current market value of the Company’s stock and the exercise price. During 2020, 2019 and 2018, the total intrinsic value of stock options exercised was $290.4 million, $356.1 million and $364.4 million, respectively. Cash received from stock options exercised during 2020 was $295.5 million and the tax benefit realized from stock options exercised totaled $59.3 million. The Company uses treasury shares purchased under the Company’s share repurchase program to satisfy share-based exercises.

A summary of the status of the Company’s stock option grants as of December 31, 2020, 2019 and 2018, and changes during the years then ended, is presented in the following table:


	2020								2019				2018
Options	Shares in millions	Weighted- average exercise price			Weighted- average remaining contractual life in years	Aggregate intrinsic value in millions			Shares in millions	Weighted- average exercise price			Shares in millions	Weighted- average exercise price
Outstanding at beginning of year	14.6		$	124.21					16.6		$	113.06	18.9		$	101.55
Granted	1.8		214.18						2.0		175.17		2.7		157.95
Exercised	(2.8)		104.58						(3.6)		97.70		(4.5)		89.31
Forfeited/expired	(0.2)		184.69						(0.4)		154.65		(0.5)		137.08
Outstanding at end of year	13.4		$	139.44	5.8		$	1,005.5	14.6		$	124.21	16.6		$	113.06
Exercisable at end of year	8.8		$	118.46	4.6		$	843.1	9.2				10.0

RSUs

RSUs generally vest 100% on the third anniversary of the grant and are payable in either shares of McDonald’s common stock or cash, at the Company’s discretion. The fair value of each RSU granted is equal to the market price of the Company’s stock at date of grant. Separately, Company executives have been awarded RSUs that vest based on Company performance. For performance-based RSUs, the Company includes a relative TSR modifier to determine the number of shares earned at the end of the performance period. The fair value of performance-based RSUs that include the TSR modifier is determined using a Monte Carlo valuation model.

A summary of the Company’s RSU activity during the years ended December 31, 2020, 2019 and 2018 is presented in the following table:


	2020				2019				2018
RSUs	Shares in millions	Weighted- average grant date fair value			Shares in millions	Weighted- average grant date fair value			Shares in millions	Weighted- average grant date fair value
Nonvested at beginning of year	1.4		$	150.95	1.5		$	132.56	1.6		$	107.34
Granted	0.6		201.92		0.6		171.48		0.6		158.28
Vested	(0.6)		127.99		(0.6)		116.42		(0.6)		91.20
Forfeited	(0.1)		172.45		(0.1)		153.58		(0.1)		132.14
Nonvested at end of year	1.3		$	176.81	1.4		$	150.95	1.5		$	132.56

The total fair value of RSUs vested during 2020, 2019 and 2018 was $119.4 million, $111.0 million and $117.9 million, respectively. The tax benefit realized from RSUs vested during 2020 was $23.6 million.