Stock Options And Other Stock Plans

12 Months Ended

Dec. 31, 2020

Stock Options And Other Stock Plans [Abstract]

4. Stock Options and Other Stock Plans

In April 2000, the shareholders approved the Union Pacific Corporation 2000 Directors Plan (Directors Plan) whereby 2,200,000 shares of our common stock were reserved for issuance to our non-employee directors. Under the Directors Plan, each non-employee director, upon his or her initial election to the Board of Directors, received a grant of 4,000 retention shares or retention stock units. In July 2018, the Board of Directors eliminated the retention grant for directors newly elected in 2018 and all future years. As of December 31, 2020, 32,000 restricted shares were outstanding under the Directors Plan.

The Union Pacific Corporation 2004 Stock Incentive Plan (2004 Plan) was approved by shareholders in April 2004. The 2004 Plan reserved 84,000,000 shares of our common stock for issuance, plus any shares subject to awards made under previous plans that were outstanding on April 16, 2004, and became available for regrant pursuant to the terms of the 2004 Plan. Under the 2004 Plan, non-qualified options, stock appreciation rights, retention shares, stock units, and incentive bonus awards may be granted to eligible employees of the Corporation and its subsidiaries. Non-employee directors are not eligible for awards under the 2004 Plan. As of December 31, 2020, 81,784 options were outstanding under the 2004 Plan. We no longer grant any stock options or other stock or unit awards under this plan.

The Union Pacific Corporation 2013 Stock Incentive Plan (2013 Plan) was approved by shareholders in May 2013. The 2013 Plan reserved 78,000,000 shares of our common stock for issuance, plus any shares subject to awards made under previous plans as of February 28, 2013, that are subsequently cancelled, expired, forfeited, or otherwise not issued under previous plans. Under the 2013 Plan, non-qualified options, incentive stock options, retention shares, stock units, and incentive bonus awards may be granted to eligible employees of the Corporation and its subsidiaries. Non-employee directors are not eligible for awards under the 2013 Plan. As of December 31, 2020, 2,486,758 options and 1,989,208 retention shares and stock units were outstanding under the 2013 Plan.

Pursuant to the above plans 69,867,405; 70,318,887; and 70,730,692; shares of our common stock were authorized and available for grant at December 31, 2020, 2019, and 2018, respectively.

Stock-Based Compensation – We have several stock-based compensation plans under which employees receive nonvested stock options, nonvested retention shares, and nonvested stock units. We refer to the nonvested shares and stock units collectively as “retention awards”. We issue treasury shares to cover option exercises and stock unit vestings, while new shares are issued when retention shares are granted.

Information regarding stock-based compensation appears in the table below:



Millions	2020		2019		2018
Stock-based compensation, before tax:
Stock options	$	15	$	16	$	17
Retention awards		58		77		79
Total stock-based compensation, before tax	$	73	$	93	$	96
Excess tax benefits from equity compensation plans	$	55	$	52	$	28

Stock Options – We estimate the fair value of our stock option awards using the Black-Scholes option pricing model. The table below shows the annual weighted-average assumptions used for valuation purposes:



Weighted-Average Assumptions	2020		2019		2018
Risk-free interest rate		1.5%		2.5%		2.6%
Dividend yield		2.1%		2.2%		2.3%
Expected life (years)		4.9		5.2		5.3
Volatility		23.4%		22.7%		21.1%
Weighted-average grant-date fair value of options granted	$	32.20	$	30.37	$	21.70

The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant; the expected dividend yield is calculated as the ratio of dividends paid per share of common stock to the stock price on the date of grant; the expected life is based on historical and expected exercise behavior; and expected volatility is based on the historical volatility of our stock price over the expected life of the option.

A summary of stock option activity during 2020 is presented below:



	Options (thous.)	Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term		Aggregate Intrinsic Value (millions)
Outstanding at January 1, 2020	3,502	$	113.38	6.1	yrs.	$	236
Granted	558		176.63	N/A			N/A
Exercised	(1,402)		100.41	N/A			N/A
Forfeited or expired	(89)		162.52	N/A			N/A
Outstanding at December 31, 2020	2,569	$	132.49	6.4	yrs.	$	195
Vested or expected to vest ‎ at December 31, 2020	2,538	$	132.11	6.4	yrs.	$	193
Options exercisable at December 31, 2020	1,547	$	112.98	5.3	yrs.	$	147

Stock options are granted at the closing price on the date of grant, have 10 year contractual terms, and vest no later than 3 years from the date of grant. None of the stock options outstanding at December 31, 2020, are subject to performance or market-based vesting conditions.

At December 31, 2020, there was $15 million of unrecognized compensation expense related to nonvested stock options, which is expected to be recognized over a weighted-average period of 0.9 years. Additional information regarding stock option exercises appears in the following table:



Millions	2020		2019		2018
Intrinsic value of stock options exercised	$	120	$	193	$	83
Cash received from option exercises		95		130		76
Treasury shares repurchased for employee payroll taxes		(24)		(37)		(20)
Tax benefit realized from option exercises		28		48		21
Aggregate grant-date fair value of stock options vested		15		15		19

Retention Awards – The fair value of retention awards is based on the closing price of the stock on the grant date. Dividends and dividend equivalents are paid to participants during the vesting periods.

Changes in our retention awards during 2020 were as follows:



	Shares (thous.)	Weighted-Average ‎Grant-Date Fair Value
Nonvested at January 1, 2020	1,898	$	112.12
Granted	315		185.99
Vested	(645)		77.74
Forfeited	(92)		141.83
Nonvested at December 31, 2020	1,476	$	141.06

Retention awards are granted at no cost to the employee and vest over periods lasting up to 4 years. At December 31, 2020, there was $88 million of total unrecognized compensation expense related to nonvested retention awards, which is expected to be recognized over a weighted-average period of 1.5 years.

Performance Retention Awards – In February 2020, our Board of Directors approved performance stock unit grants. The basic terms of these performance stock units are identical to those granted in February 2019, except for different annual return on invested capital (ROIC) performance targets. The plan also includes relative operating income growth (OIG) as a modifier compared to the companies included in the S&P 500 Industrials Index. We define ROIC as net operating profit adjusted for interest expense (including interest on average operating lease liabilities) and taxes on interest divided by average invested capital adjusted for average operating lease liabilities. The modifier can be up to +/- 25% of the award earned based on the ROIC achieved.

Stock units awarded to selected employees under these grants are subject to continued employment for 37 months and the attainment of certain levels of ROIC, modified for the relative OIG. We expense the fair value of the units that are probable of being earned based on our forecasted ROIC over the 3-year performance period, and with respect to the third year of the plan, the relative OIG modifier. We measure the fair value of these performance stock units based upon the closing price of the underlying common stock as of the date of grant. Dividend equivalents are accumulated during the service period and paid to participants only after the units are earned.

Changes in our performance retention awards during 2020 were as follows:



	Shares (thous.)	Weighted-Average ‎Grant-Date Fair Value
Nonvested at January 1, 2020	929	$	123.32
Granted	287		177.23
Vested	(339)		102.97
Unearned	(8)		153.89
Forfeited	(96)		153.74
Nonvested at December 31, 2020	773	$	148.17

At December 31, 2020, there was $16 million of total unrecognized compensation expense related to nonvested performance retention awards, which is expected to be recognized over a weighted-average period of 0.9 years. This expense is subject to achievement of the performance measures established for the performance stock unit grants.