Shared-Based Compensation

9 Months Ended

Sep. 30, 2019

We currently sponsor employee and director stock option, restricted stock and employee stock purchase plans. Stock options and restricted stock are granted at the discretion of the Compensation Committee of our Board of Directors based on the estimated fair value on the date of grant. The fair value of the stock options and restricted stock on the date of grant is recognized as expense over the vesting period, net of forfeitures. The non-cash compensation expenses recognized in our consolidated statements of income for stock options, restricted stock and under our employee stock purchase plan were $100 million and $93 million for the nine months ended September 30, 2019 and 2018, respectively, and $36 million and $32 million for the three months ended September 30, 2019 and 2018, respectively.

Stock Option Plans

The following is a summary of stock option activity for the nine months ended September 30, 2019:



	Number of Options (in thousands)		Weighted Average Exercise Price per Option
Outstanding at December 31, 2018	3,610		$	46.44
Granted	493		76.16
Exercised	(575	)	38.71
Outstanding at September 30, 2019	3,528		51.86

Details of stock options outstanding as of September 30, 2019 are as follows:



	Number of Options (in thousands)	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value (In millions)
Vested or expected to vest	3,528	$	51.86	6.4	$	143
Exercisable	2,458	$	44.27	5.4	$	118

The total intrinsic value of stock options exercised was $25 million for both the nine months ended September 30, 2019 and 2018, and $7 million and $6 million for the three months ended September 30, 2019 and 2018, respectively. As of September 30, 2019, there were $10 million in total unrecognized compensation costs related to stock options. These costs are expected to be recognized over a weighted average period of 1.6 years as the stock options vest.

We use the Black-Scholes option pricing model to value our stock option awards. During the nine months ended September 30, 2019 and 2018, we used the weighted-average assumptions in the table below to compute the value of all options for shares of common stock granted to employees:



	Nine Months Ended September 30,
Assumptions:	2019			2018
Risk-free interest rate	2.49		%	2.67		%
Expected life in years	5.9			6.0
Expected volatility	20		%	20		%
Expected dividend yield	1.44		%	1.43		%
Estimated weighted-average fair value of options granted per share	$	15.45		$	14.08

The risk-free interest rate is based on the zero-coupon U.S. Treasury yield curve in effect at the date of grant. The expected life is derived from historical and anticipated future exercise patterns. Expected volatility is based on historical volatility data of our stock.

Restricted Stock Plans

Our restricted shares have vesting conditions based on company performance linked to both short-term and long-term stockholder return as well as retention objectives. The grant date fair value of our restricted stock awards is based on the closing stock price on the date of grant.

In February 2019, we reserved a maximum of 1.1 million restricted shares for potential issuance as performance-based restricted shares to certain of our employees. The number of shares that will ultimately be granted under this award will be based on our actual financial performance as compared to financial performance targets set by our Board of Directors and

the Compensation Committee of our Board of Directors for the year ending December 31, 2019, as well as our 2019 total stockholder return, or TSR, as compared to that of the S&P 500 Index. The maximum compensation expense to be recognized under these performance-based restricted shares is $82 million if the maximum financial performance target is met and all 1.1 million shares vest. The compensation expense to be recognized under these performance-based restricted shares will be $41 million if the target financial performance is met, which would result in 0.6 million shares vesting. We recognize expense on an accelerated basis over the three-year vesting period based on our quarterly assessment of the probable 2019 actual financial performance as compared to the 2019 financial performance targets. As of September 30, 2019, we determined that it is probable that the financial performance level will be at target for 2019. Based on this assessment, we recorded non-cash compensation expense of $15 million and $6 million for the nine and three months ended September 30, 2019, respectively, related to these shares and the remaining $26 million in non-cash compensation expense will be recorded on an accelerated basis over the remaining vesting period, including $7 million which will be recorded over the remainder of 2019.

The following is a summary of the non-vested restricted share activity for the nine months ended September 30, 2019:



	Number of Restricted Shares (in thousands)	Weighted Average Grant-Date Fair Value per Share
Non-vested at December 31, 2018	4,470	$	60.56
Granted	1,675	76.65
Vested	(2,191)	57.64
Forfeited	(189)	66.38
Non-vested at September 30, 2019	3,765	69.13

The shares granted include 1 million time-based restricted shares and the remainder are performance-based. Performance-based restricted shares have been presented to reflect the actual shares to be issued based on the achievement of past performance targets, also considering the impact of any market conditions. Non-vested performance-based restricted shares granted are presented in the table above at the target number of restricted shares that would vest if the performance targets are met. As of September 30, 2019, there were $137 million in total unrecognized compensation costs related to time-based and performance-based restricted stock. These costs are expected to be recognized over a weighted-average period of 1.4 years as the restricted stock vests. These unrecognized compensation costs assume that a target performance level will be met on the performance-based restricted shares granted in February 2019. During the nine months ended September 30, 2019 and 2018, the total fair value of restricted stock vested under all restricted stock plans was $166 million and $201 million, respectively.

Bakkt Incentive Units

In February 2019, our Board approved the adoption of the Bakkt Equity Incentive Plan to issue various Bakkt equity unit awards. Under this plan, during the nine months ended September 30, 2019, Bakkt issued 101 million, 4 million and 8 million of its preferred, common and phantom incentive units, respectively, to certain employees and Board members. The issued units are unvested at the issuance date, are subject to the vesting terms in the award agreements and upon vesting are converted into Bakkt equity or cash. With the assistance of third-party valuation experts and based on our assumptions as of the issuance date, we estimate that approximately $46 million of compensation expense will be recognized over an eight-year period associated with these awards.