Share-Based Compensation

9 Months Ended

Sep. 30, 2019

Share-based Payment Arrangement [Abstract]

The Company recognizes the fair value of share-based compensation awards granted to employees in cost of processing and services, cost of product, and selling, general and administrative expense in its consolidated statements of income.

The Company’s share-based compensation awards are typically granted in the first quarter of the year and primarily consist of the following:

Stock Options – The Company grants stock options to employees and non-employee directors at exercise prices equal to the fair market value of the Company’s stock on the dates of grant. Stock options generally vest over a three-year period beginning on the first anniversary of the grant. All stock options expire ten years from the date of the award. The Company recognizes compensation expense for the fair value of the stock options over the requisite service period of the stock option award.

Restricted Stock Units and Awards – The Company grants restricted stock units and awards to employees and non-employee directors. The Company recognizes compensation expense for restricted stock units and awards based on the market price of the common stock on the grant date over the period during which the units or awards vest.

Performance Share Units and Awards – The Company grants performance share units and awards to employees. The number of shares issued at the end of the performance period is determined by the level of achievement of pre-determined performance and market goals, including earnings, revenue growth, synergy attainment and shareholder return. The Company recognizes compensation expense on performance share units and awards ratably over the requisite performance period of the award to the extent management views the performance goals as probable of attainment. The Company recognizes compensation expense for the fair value of the shareholder return component over the requisite service period of the award.

Employee Stock Purchase Plan – The Company maintains an employee stock purchase plan that allows eligible employees to purchase a limited number of shares of common stock each quarter through payroll deductions at 85% of the closing price of the Company’s common stock on the last business day of each calendar quarter. The Company recognizes compensation expense related to the 15% discount on the purchase date.

The Company recognized $87 million and $121 million of share-based compensation expense during the three and nine months ended September 30, 2019, respectively, and $18 million and $54 million of share-based compensation expense during the three and nine months ended September 30, 2018, respectively. At September 30, 2019, the total remaining unrecognized compensation cost for unvested stock options, restricted stock units and awards and performance share units, net of estimated forfeitures, of $565 million is expected to be recognized over a weighted-average period of 1.8 years. During the nine months ended September 30, 2019 and 2018, stock options to purchase 3.3 million and 2.2 million shares, respectively, were exercised.

Acquisition of First Data

Upon the completion of the First Data acquisition on July 29, 2019 (see Note 4), First Data’s equity awards, whether vested or unvested, were either settled in shares of the Company’s common stock or converted into equity awards denominated in shares of the Company’s common stock based on a defined exchange ratio of 0.303, as described below.

First Data time-vesting awards that were granted at or prior to the initial public offering of First Data (“First Data IPO”) were accelerated in full in accordance with their terms, except for certain executive officer awards and certain awards held by retirement-eligible employees, which were not accelerated and instead converted into equity awards denominated in shares of

the Company’s common stock. Each such time-vesting, pre-IPO restricted stock and restricted stock unit award was settled in shares of the Company’s common stock based on the exchange ratio. Each time-vesting, pre-IPO stock option award was converted into an option to purchase a number of shares of the Company’s common stock based on the exchange ratio with an exercise price per share equal to the exercise price per share of such stock option award immediately prior to the completion of the acquisition divided by the exchange ratio.

First Data equity awards granted at the time of First Data’s IPO that were subject to vesting solely upon achievement of a $32 price per share of First Data common stock were converted into equity awards denominated in shares of the Company’s common stock and remained eligible to vest upon satisfaction of an adjusted performance condition based on a target price per share of the Company’s common stock equal to the existing First Data target price divided by the exchange ratio. Each restricted stock and restricted stock unit award that was a performance-vesting IPO award was converted into an award denominated in shares of the Company’s common stock based on the exchange ratio, and each stock option award that was a performance-vesting award was converted into an option to purchase a number of shares of the Company’s common stock based on the exchange ratio with an exercise price per share equal to the exercise price per share of such stock option award immediately prior to the completion of the acquisition divided by the exchange ratio. As converted, the performance-vesting awards continued to be governed by the same terms and conditions as were applicable prior to the acquisition and vested during the three months ended September 30, 2019 upon satisfaction of the adjusted performance condition.

The remaining existing First Data equity awards, whether vested or unvested, were converted into equity awards denominated in shares of the Company’s common stock based on the exchange ratio, with an exercise price per share for option awards equal to the exercise price per share of such stock option award immediately prior to the completion of the acquisition divided by the exchange ratio, and will continue to be governed by generally the same terms and conditions as were applicable prior to the acquisition; provided that, subject to compliance with Section 409A of the Internal Revenue Code, such awards will accelerate upon a covered termination as defined in the merger agreement.

The portion of the fair value of the replacement awards related to services provided prior to the acquisition was $768 million and was accounted for as consideration transferred. The remaining portion of the fair value of $467 million is associated with future service and will be recognized as compensation expense, net of estimated forfeitures, over the weighted-average remaining vesting period of 1.2 years. The fair value of options that the Company assumed in connection with the acquisition of First Data were estimated using the Black-Scholes model with the following assumptions:



Expected life (in years)	2.5
Average risk-free interest rate	1.9	%
Expected volatility	27.4	%
Expected dividend yield	0	%

Share-Based Compensation Activity

The weighted-average estimated fair value of stock options granted during the nine months ended September 30, 2019 and 2018 was $28.44 and $22.48 per share, respectively. The fair values of stock options granted were estimated on the date of grant using a binomial option-pricing model with the following assumptions:



	2019		2018
Expected life (in years)	6.4		6.3
Average risk-free interest rate	2.7	%	2.2	%
Expected volatility	28.5	%	28.3	%
Expected dividend yield	0	%	0	%

The Company determined the expected life of stock options using historical data adjusted for known factors that could alter historical exercise behavior. The risk-free interest rate is based on the U.S. treasury yield curve in effect as of the grant date. Expected volatility is determined using weighted-average implied market volatility combined with historical volatility. The Company believes that a blend of historical volatility and implied volatility better reflects future market conditions and better indicates expected volatility than purely historical volatility.

A summary of stock option activity is as follows:



	Shares (In thousands)		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (In millions)
Stock options outstanding - December 31, 2018	12,052		$	33.96
Converted First Data stock options	7,591		62.54
Granted	1,177		84.77
Forfeited	(158	)	68.17
Exercised	(3,265	)	35.94
Stock options outstanding - September 30, 2019	17,397		$	49.19	5.03	$	1,079
Stock options exercisable - September 30, 2019	14,531		$	45.00	4.37	$	986

A summary of restricted stock unit and performance share unit activity is as follows:



	Restricted Stock Units				Performance Share Units
	Shares (In thousands)		Weighted-Average Grant Date Fair Value		Shares (In thousands)		Weighted-Average Grant Date Fair Value
Units - December 31, 2018	1,821		$	53.22	524		$	57.60
Converted First Data units	6,025		102.30		1,333		101.96
Granted	533		91.35		1,107		96.72
Forfeited	(173	)	74.02		(238	)	50.96
Vested	(945	)	70.21		(405	)	90.03
Units - September 30, 2019	7,261		$	93.97	2,321		$	99.25

A summary of restricted stock award and performance share award activity is as follows:



	Restricted Stock Awards			Performance Share Awards
	Shares (In thousands)	Weighted-Average Grant Date Fair Value		Shares (In thousands)		Weighted-Average Grant Date Fair Value
Awards - December 31, 2018	—	$	—	—		$	—
Converted First Data awards	96	102.30		264		87.57
Granted	—	—		—		—
Forfeited	—	—		(16	)	87.57
Vested	—	—		(248	)	87.57
Awards - September 30, 2019	96	$	102.30	—		$	—

The table below represents additional information related to stock option and restricted stock unit activity:



(In millions)	2019		2018
Total intrinsic value of stock options exercised	$	211	$	119
Fair value of restricted stock units vested	158		36
Income tax benefit from stock options exercised and restricted stock units vested	89		36
Cash received from stock options exercised	73		25

As of September 30, 2019, 33.2 million share-based awards were available for grant under the Amended and Restated Fiserv, Inc. 2007 Omnibus Incentive Plan. Under its employee stock purchase plan, the Company issued 0.5 million shares during the first nine months of 2019, and 0.5 million shares during the first nine months of 2018. As of September 30, 2019, there were 24.9 million shares available for issuance under the employee stock purchase plan.