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Stock Plans and Share-Based Compensation | 12 Months Ended
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Dec. 31, 2019
Share-based Payment Arrangement [Abstract] |
Stock Plans and Share-Based Compensation | Stock Plans and Share-Based Compensation Under CSX's share-based compensation plans, awards consist of performance units, stock options, restricted stock units and restricted stock awards for management and stock grants for directors. Awards granted under the various programs are determined and approved by the Compensation Committee of the Board of Directors or, in certain circumstances, by the full Board for awards to the Chief Executive Officer or by the Chief Executive Officer for awards to management employees other than senior executives. The Board of Directors approves awards granted to CSX's non-management directors upon recommendation of the Governance Committee. Share-based compensation expense for awards under share-based compensation plans and purchases made as part of the employee stock purchase plan is measured using the fair value of the award on the grant date and is recognized on a straight-line basis over the service period of the respective award. Forfeitures are recognized as they occur. Total pre-tax expense and income tax benefits associated with share-based compensation are shown in the table below. Income tax benefits include impacts from option exercises and the vesting of other equity awards. Modifications to the terms of awards (see Equity Award Modifications below) impacted share-based compensation expense in 2017.
| Fiscal Years
(Dollars in Millions) | 2019 | 2018 | 2017
Share-Based Compensation Expense |  |  |
Performance Units | $ | 42 |  | $ | 28 |  | $ | 49 |
Stock Options | 18 |  | 13 |  | 22 |
Restricted Stock Units and Awards | 8 |  | 6 |  | 15 |
Stock Awards for Directors | 2 |  | 2 |  | 3 |
Employee Stock Purchase Plan | 4 |  | 2 |  | — |
Total Share-based Compensation Expense | $ | 74 |  | $ | 51 |  | $ | 89 |
Income Tax Benefit | $ | 43 |  | $ | 26 |  | $ | 42 |
NOTE 4. Stock Plans and Share-Based Compensation, continued Long-term Incentive Plans The CSX Long-term Incentive Plans (“LTIP”) were adopted under the 2010 CSX Stock and Incentive Award Plan. On May 3, 2019, shareholders approved the CSX 2019 Stock and Incentive Award Plan, under which future awards will be granted. The objective of these plans is to motivate and reward certain employees for achieving and exceeding certain financial goals. Grants were made in performance units, with each unit being equivalent to one share of CSX common stock, and payouts will be made in CSX common stock. The payout range for most participants will be between 0% and 200% of the target awards depending on Company performance against predetermined goals for each three-year cycle. In 2019, 2018, and 2017, target performance units were granted to certain employees under three separate LTIP plans covering three-year cycles: the 2019-2021 ("2019-2021 LTIP"), the 2018-2020 (“2018-2020 LTIP”), and the 2017-2019 (“2017-2019 LTIP”) plans. The key financial targets for the 2017-2019 LTIP plan are based on the achievement of goals related to both operating ratio and return on assets (tax-adjusted operating income divided by net property) excluding certain items as disclosed in the Company's financial statements. The three-year cumulative operating ratio and average return on assets over the performance period will each comprise 50% of the payout and are measured independently of the other. This plan states that payouts for certain executive officers are subject to downward adjustment by up to 30% based upon total shareholder return relative to specified comparable groups. Payouts of performance units for the 2018-2020 and 2019-2021 LTIP plans will be based on the achievement of goals related to both operating ratio and free cash flow, in each case excluding non-recurring items as disclosed in the Company’s financial statements. For the 2018-2020 LTIP plan, the final year operating ratio and cumulative free cash flow over the plan period will each comprise 50% of the payout and will be measured independently of the other. For the 2019-2021 LTIP plan, the cumulative operating ratio and cumulative free cash flow over the plan period will each comprise 50% of the payout and will be measured independently of the other. For these plans, payouts for certain executive officers are subject to formulaic upward or downward adjustment by up to 25%, capped at an overall payout of 200% for the 2018 plan and 250% for the 2019 plan, based upon the Company’s total shareholder return relative to specified comparable groups over the performance period. The fair value of the performance units awarded during the years ended December 2019 and 2018 were calculated using a Monte-Carlo simulation model with the following weighted-average assumptions:
Weighted-average assumptions used: | 2019 | 2018
Annual dividend yield | 1.4 | % | 1.6 | %
Risk-free interest rate | 2.4 | % | 2.3 | %
Annualized volatility | 27.4 | % | 29.1 | %
Expected life (in years) | 2.8 |  | 2.9 |
NOTE 4. Stock Plans and Share-Based Compensation, continued Performance unit grant and vesting information is summarized as follows:
| Fiscal Years
| 2019 |  | 2018 |  | 2017
Weighted-average grant date fair value | $ | 66.18 |  |  | $ | 55.57 |  |  | $ | 49.50 |
Fair value of units vested in fiscal year ending (in millions) | $ | 17 |  |  | $ | 14 |  |  | $ | 26 |
The performance unit activity related to the outstanding long-term incentive plans and corresponding fair value is summarized as follows:
| Performance Units Outstanding (in Thousands) |  | Weighted-Average Fair Value at Grant Date
Unvested at December 31, 2018 | 722 |  |  | $ | 52.58 |
Granted | 337 |  |  | 66.18 |
Forfeited | (75 | ) |  | 57.20 |
Vested | (341 | ) |  | 49.52 |
Unvested at December 31, 2019 | 643 |  |  | $ | 60.58 |
As of December 2019, there was $23 million of total unrecognized compensation cost related to performance units that is expected to be recognized over a weighted-average period of approximately two years. Stock Options Stock options in 2019, 2018, and 2017 were primarily granted along with the corresponding LTIP plans. Under this program, an employee receives an award that provides the opportunity in the future to purchase CSX shares at the closing market price of the stock on the date the award is granted (the strike price). Options granted in 2019 become exercisable either in equal installments on the anniversary of the grant date over a vesting period (three-year graded), or three years after the grant date (three-year cliff), depending on the individual grant. The options granted in 2018 and 2017 vest three years after the grant date (three-year cliff). All options expire 10 years from the grant date if they are not exercised. The fair value of stock options granted was estimated as of the dates of grant using the Black-Scholes-Merton option model which uses the following assumptions: dividend yield, risk-free interest rate, annualized volatility and expected life. The annual dividend yield is based on the most recent quarterly CSX dividend payment annualized. The risk-free interest rate is based on U.S. Treasury yield curve in effect at the time of grant. The annualized volatility is based on historical volatility of daily CSX stock price returns over a 6.1 year look-back period ending on the grant date. The expected life is calculated using the safe harbor approach due to lack of historical data on CSX options, which is the midpoint between the vesting schedule and contractual term (10 years). In March 2017, the Company granted 9 million stock options to former CEO E. Hunter Harrison at a fair value of $12.88 per option. These options were granted with a 10-year term and an exercise price equal to the closing market price of the underlying stock on the date of grant. Upon his death in December 2017, all of Mr. Harrison's 9 million options were forfeited. NOTE 4. Stock Plans and Share-Based Compensation, continued Assumptions and inputs used to estimate fair value of stock options are summarized as follows:
| Fiscal Years
| 2019 | 2018 | 2017
Weighted-average grant date fair value | $ | 17.87 |  | $ | 14.65 |  | $ | 12.84 |
Stock options valuation assumptions: |  |  |
Annual dividend yield | 1.3 | % | 1.5 | % | 1.5 | %
Risk-free interest rate | 2.4 | % | 2.6 | % | 2.2 | %
Annualized volatility | 25.7 | % | 27.0 | % | 27.1 | %
Expected life (in years) | 6.1 |  | 6.5 |  | 6.3 |
Other pricing model inputs: |  |  |
Weighted-average grant-date market price of CSX stock (strike price) | $ | 70.01 |  | $ | 54.19 |  | $ | 49.63 |
The stock option activity is summarized as follows:
| Stock Options Outstanding (in Thousands) | Weighted-Average Exercise Price | Weighted-Average Remaining Contractual Life (in Years) | Aggregate Intrinsic Value (in Millions)
Outstanding at December 31, 2018 | 4,673 |  | $ | 34.89 |  |  |
Granted | 1,187 |  | 70.01 |  |  |
Forfeited | (212 | ) | 55.35 |  |  |
Exercised | (1,853 | ) | 24.48 |  |  |
Outstanding at December 31, 2019 | 3,795 |  | $ | 49.78 |  | 7.5 | $ | 87 |
Exercisable at December 31, 2019 | 1,026 |  | $ | 24.60 |  | 6.0 | $ | 49 |
Unrecognized compensation expense related to stock options as of December 2019 was $15 million and is expected to be recognized over a weighted-average period of approximately two years. The Company issues new shares upon stock option exercises. There were no significant exercises during 2017 or 2018. Additional information on stock option exercises in 2019 is summarized as follows:
(Dollars in Millions) | 2019
Intrinsic value of stock options exercised | $ | 87 |
Cash received from option exercises | $ | 45 |
NOTE 4. Stock Plans and Share-Based Compensation, continued Restricted Stock Grants Restricted stock grants consist of units and awards, each equivalent to one share of CSX stock. Restricted stock units are primarily issued along with corresponding LTIP plans and vest three years after the date of grant. Separately, restricted stock awards generally vest over an employment period of up to five years. Participants receive cash dividend equivalents on the unvested shares during the restriction period. These awards are time-based and not based upon CSX’s attainment of operational targets. Restricted stock grant and vesting information is summarized as follows:
| Fiscal Years
| 2019 |  | 2018 |  | 2017
Weighted-average grant date fair value | $ | 69.19 |  |  | $ | 62.60 |  |  | $ | 48.35 |
Fair value of units and awards vested during fiscal year ended (in millions) | $ | 7 |  |  | $ | 9 |  |  | $ | 8 |
The restricted stock activity related to the outstanding long-term incentive plans and other awards and corresponding fair value is summarized as follows:
| Restricted Stock Units and Awards Outstanding (in Thousands) |  | Weighted-Average Fair Value at Grant Date
Unvested at December 31, 2018 | 684 |  |  | $ | 39.30 |
Granted | 88 |  |  | 69.19 |
Forfeited | (30 | ) |  | 53.28 |
Vested | (315 | ) |  | 24.21 |
Unvested at December 31, 2019 | 427 |  |  | $ | 57.29 |
As of December 2019, unrecognized compensation expense for these restricted stock units and awards was approximately $8 million, which will be expensed over a weighted-average remaining period of two years. Equity Award Modifications In 2017, as part of an enhanced severance benefit under the management streamlining and realignment initiative discussed in Note 1, unvested performance units, restricted stock units and stock options for separated employees not eligible for retirement were permitted to vest on a pro-rata basis. Additionally, the terms of unvested equity awards for a former Chief Executive Officer, Michael J. Ward, and a former President, Clarence W. Gooden, were modified prior to their retirements on March 6, 2017 to permit prorated vesting through May 31, 2018. The award modifications impacted approximately 75 employees and resulted in an increase to share-based compensation expense for revaluation of the affected awards of $39 million for the year ended December 31, 2017. The expense associated with these award modifications was included in the 2017 restructuring charge. No significant award modifications took place in 2019 or 2018. NOTE 4. Stock Plans and Share-Based Compensation, continued Stock Awards for Directors CSX’s non-management directors receive a base annual retainer of $112,500 to be paid quarterly in cash, unless the director chooses to defer the retainer in the form of cash or CSX common stock. Additionally, non-management directors receive an annual grant of common stock in the amount of approximately $162,500, with the number of shares to be granted based on the average closing price of CSX stock in the months of November, December and January. The independent non-executive Chairman also receives an annual grant of common stock in the amount of approximately $250,000, with the number of shares to be granted based on the average closing price of CSX stock in the months of November, December, and January. Employee Stock Purchase Plan In May 2018, shareholders approved the 2018 CSX Employee Stock Purchase Plan (“ESPP”) for the benefit of Company employees. The Company registered 4 million shares of common stock that may be issued pursuant to this plan. Under the ESPP, employees may contribute between 1% and 10% of base compensation, after-tax, to purchase up to $25,000 of CSX common stock per year at 85% of the closing market price on either the grant date or the last day of the six-month offering period, whichever is lower. During 2019, the Company issued approximately 250 thousand shares under the ESPP.

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