2010 Incentive Award Plan. In April 2010, the Company’s stockholders approved the 2010 Incentive Award Plan (“2010 Plan”). Under this plan, the Company can issue RSUs, nonqualified stock options (“NSOs”), and PSUs to employees, non-employee directors, and consultants. Equity awards granted to employees and non-employee directors include a mix of RSUs, stock options, and, as applicable, PSUs. The 2010 Plan generally permits NSOs to be granted at no less than the fair market value of the common stock on the date of grant. Prior to 2022, NSOs were granted with terms of 10 years from the date of the grant. In January 2022, the Company changed the term of its new NSO grants to 7 years from the date of the grant. The 2010 Plan expires in 2032. In April 2022, the Company’s shareholders approved an amended and restated 2010 Plan to provide for an increase in the number of shares of common stock reserved for issuance thereunder from 103,350,000 to 110,350,000. As of December 31, 2023, approximately 20.6 million shares were reserved for future issuance under the 2010 Plan. A maximum of approximately 8.9 million of these shares can be awarded as RSUs.

2009 Employment Commencement Incentive Plan. In October 2009, the Board adopted the 2009 Employment Commencement Incentive Plan (“New Hire Plan”). The New Hire Plan provides for the shares to be used exclusively for the grant of RSUs and NSOs to new employees (“New Hire Options”), who were not previously employees or non-employee directors of the Company. The Compensation Committee approves all equity awards under the New Hire Plan, which are granted to newly-hired employees once a month on the fifth business day of each month after their hire. Options are granted at an exercise price not less than the fair market value of the stock on the date of grant and have a term not to exceed 10 years.

In April 2015, the Board of Directors amended and restated the New Hire Plan to provide for an increase in the number of shares of common stock authorized for issuance pursuant to awards granted under the New Hire Plan from 10,395,000 to 13,095,000. The New Hire Plan expired in October 2019 and, therefore, there are no shares reserved for future grants under the New Hire Plan. However, awards granted prior to the plan’s expiration continue to remain outstanding until their original expiration date.

Restricted Stock Units. The RSUs granted to employees vest in one-fourth increments annually over a four-year period. The RSUs granted to existing non-employee directors vest one year from the date of grant or at the next Annual Shareholders Meeting, whichever comes first. New non-employee directors receive pro-rated RSU grants that vest on the same term as the annual RSU grants. The number of shares issued on the date the RSUs vest is net of the minimum statutory tax withholdings, which are paid in cash to the appropriate taxing authorities on behalf of the Company’s employees.

Nonqualified Stock Options. Prior to 2020, annual NSO grants were made to employees on February 15 (or the next business day if the date is not a business day) and on August 15 (or the next business day if the date is not a business day). In 2020, the Company changed the timing of its annual NSO grants to the last trading day of February and on the same date in August or, if that date is not a trading day, the next trading day. Beginning in 2023, the Company changed the timing of its annual NSO grants to the last trading day of February and August 10 or, if that date is not a trading day, the next trading day. Prior to 2023, the February NSO grants vest 1/8 upon completion of 6 months of service and 1/48 per month thereafter. Beginning in 2023, the February NSO grants vest 1/8 on August 10 and 1/48 per month thereafter. The August NSO grants vest 7/48 at the end of one month and 1/48 per month thereafter through a 3.5-year vesting period. NSOs granted to new hires generally vest 1/4 upon completion of one year of service and 1/48 per month thereafter. NSOs granted to existing non-employee directors vest one year from the date of grant or at the next Annual Shareholders Meeting, whichever comes first. New non-employee directors receive pro-rated NSO grants that vest on the same term as the annual NSO grants. Option vesting terms are determined by the Board and, in the future, may vary from past practices.

Performance Stock Units. In February 2022, the Company began granting PSUs to officers and other key employees, subject to three-year cliff vesting and pre-established, quantitative goals. Whether any PSUs vest, and the amount that do vest, is tied to completion of service over three years and the achievement of three equally-weighted, quantitative goals that directly align with or help drive the Company’s strategy and long-term total shareholder return.

2000 Non-Employee Directors’ Stock Option Plan. In March 2000, the Board of Directors adopted the 2000 Non-Employee Directors’ Stock Option Plan (the “Directors’ Plan”). In October 2009, the automatic evergreen increase provisions were eliminated so that no further automatic increases would be made to the number of shares reserved for issuance under the Directors’ Plan. In addition, the common stock authorized for issuance under the Directors’ Plan was reduced to 1,350,000. Options are granted at an exercise price not less than the fair market value of the stock on the date of grant and have a term not to exceed 10 years. Prior to 2016, initial stock option grants to new non-employee directors vested over a three-year period with 1/3 of the shares vesting after one year from the date of grant and 1/36 of the shares vesting monthly thereafter. Annual stock option grants vested one year from the date of the grant. Since 2016, new non-employee directors received pro-rated stock option grants that vest on the same term as the annual stock option grants. The Directors’ Plan was terminated in November 2020 and, therefore, there are no shares reserved for future grants under the Directors’ Plan. However, options granted prior to the plan’s termination continue to remain outstanding until their original expiration date.

2000 Employee Stock Purchase Plan. In March 2000, the Board adopted the ESPP. Employees are generally eligible to participate in the ESPP if they are customarily employed by the Company for more than 20 hours per week and more than 5 months in a calendar year and are not 5% stockholders of the Company. Under the ESPP, eligible employees may select a rate of payroll deduction up to 15% of their eligible compensation subject to certain maximum purchase limitations. The duration for each offering period is 24 months and is divided into four purchase periods of approximately six months in length. Offerings are concurrent. The purchase price of the shares under the offering is the lesser of 85% of the fair market value of the shares on the offering date or 85% of the fair market value of the shares on the purchase date. A two-year look-back feature in the ESPP causes the offering period to reset if the fair value of the Company’s common stock on the first or last day of the purchase period is less than that on the original offering date. ESPP purchases by employees are settled with newly-issued common stock from the ESPP’s previously authorized and available pool of shares. In April 2017, the Company’s stockholders approved an amended and restated ESPP to provide for an increase in the number of shares of common stock reserved for issuance from 18,270,945 to 22,770,945. As of December 31, 2023, there were approximately 1.8 million shares reserved for future issuance under the ESPP.

The aggregate intrinsic value of stock options exercised under the Company’s stock plans determined as of the date of option exercise was $476 million, $315 million, and $613 million during the years ended December 31, 2023, 2022, and 2021, respectively. Cash received from stock option exercises for the years ended December 31, 2023, 2022, and 2021, was $192 million, $146 million, and $201 million, respectively. The income tax benefit from stock options exercised was $109 million for the year ended December 31, 2023.


	Options Outstanding						Options Exercisable
Range of Exercise Prices	Number of Shares	Weighted-Average Remaining Contractual Life	Weighted-Average Exercise Price Per Share		Aggregate Intrinsic Value (1)		Number of Shares	Weighted-Average Remaining Contractual Life	Weighted-Average Exercise Price Per Share		Aggregate Intrinsic Value (1)
$39.22-$57.11	1.1	0.8	$	53.14			1.1		$	53.14
$57.85-$77.00	1.3	2.2	$	65.86			1.3		$	65.86
$77.04-$139.52	1.3	3.6	$	108.66			1.3		$	108.66
$143.49-$174.26	1.1	5.1	$	169.00			1.1		$	169.01
$175.53-$182.83	1.0	5.6	$	179.98			1.0		$	180.02
$182.90-$229.39	1.3	5.9	$	216.85			0.5		$	209.47
$235.20-$262.70	1.0	6.8	$	244.47			0.7		$	244.09
$271.22-$304.67	1.2	6.0	$	297.47			0.4		$	294.41
$313.64-$341.16	0.0	6.6	$	323.28			0.0		$	334.66
$347.42-$347.42	0.5	7.6	$	347.42			0.3		$	347.42





Total	9.8	4.6	$	174.89	$	1,589	7.7	4.2	$	151.68	$	1,441

The 2022 PSU grant metrics are focused on relative total shareholder return (“TSR”), year-over-year da Vinci procedure growth for 2023, and two-year compound annual da Vinci procedure growth for 2024. The 2023 PSU grant metrics are focused on relative TSR, da Vinci and Ion procedure growth in 2024 compared to 2022, and da Vinci and Ion procedure growth in 2025 compared to 2022. The TSR metric is considered a market condition, and the expense is determined at the grant date. The procedure growth metrics are considered performance conditions, and the expense is recorded based on the forecasted performance, which is reassessed each reporting period based on the probability of achieving the performance conditions. The number of shares earned at the end of the three-year period will vary, based on actual performance, from 0% to 125% of the target number of PSUs granted. PSUs are subject to forfeiture if employment terminates prior to the vesting date. PSUs are not considered issued or outstanding shares of the Company.

The Company calculates the fair value for each component of the PSUs individually. The fair value for the component with the TSR metric was determined using Monte Carlo simulation. The fair value per share for the components with the procedure growth metrics is equal to the closing stock price on the grant date.


	Years Ended December 31,
	2023		2022		2021
Cost of sales – products (before capitalization)	$	92.7	$	79.0	$	68.9
Amounts capitalized into inventory (1)	(84.3)		(17.2)		—
Amounts recognized in income for amounts previously capitalized in inventory	75.0		5.8		—
Cost of revenue—product	83.4		67.6		68.9
Cost of revenue—service	28.2		23.6		22.2
Total cost of revenue	111.6		91.2		91.1
Selling, general and administrative	274.8		261.1		231.6
Research and development	211.8		164.2		134.1
Share-based compensation expense before income taxes	598.2		516.5		456.8
Income tax benefit	117.4		101.7		93.7
Share-based compensation expense after income taxes	$	480.8	$	414.8	$	363.1

(1)Share-based compensation expense subject to capitalization into inventory was not material during 2021 and the first three quarters of 2022, and, therefore, not recorded. The Company commenced capitalization of share-based compensation expense into inventory during the quarter ended December 31, 2022, on a prospective basis.

The Black-Scholes-Merton option pricing model is used to estimate the fair value of stock options granted under the Company’s share-based compensation plans and the rights to acquire stock granted under the ESPP. The weighted-average estimated fair values of stock options and the rights to acquire stock under the ESPP, as well as the weighted-average assumptions used in calculating the fair values of stock options and the rights to acquire stock under the ESPP that were granted during the years ended December 31, 2023, 2022, and 2021, were as follows:


	Years Ended December 31,
	2023	2022	2021
RSUs
Fair value at grant date	$237.37	$272.97	$256.52
STOCK OPTIONS
Risk-free interest rate	4.6%	2.6%	0.8%
Expected term (in years)	3.2	3.2	4.1
Expected volatility	33%	38%	32%
Fair value at grant date	$77.45	$73.65	$78.23
PSUs
Fair value at grant date	$240.45	$299.32	$—
ESPP
Risk-free interest rate	5.0%	2.1%	0.1%
Expected term (in years)	1.2	1.2	1.2
Expected volatility	33%	39%	29%
Fair value at grant date	$89.42	$80.61	$89.98

As of December 31, 2023, there was $761 million, $134 million, $38 million, and $22 million of total unrecognized compensation expense related to unvested restricted stock units, unvested stock options, unvested performance stock units, and rights granted to acquire common stock under the ESPP, respectively. The unrecognized compensation expense is expected to be recognized over a weighted-average period of 2.4 years for unvested restricted stock units, 2.5 years for unvested stock options, 1.8 years for unvested performance stock units, and 0.6 years for rights granted to acquire common stock under the ESPP.