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Stock Plans and Share-Based Compensation | 12 Months Ended
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Dec. 31, 2021
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 and Talent Management Committee of the Board of Directors. Awards to the Chief Executive Officer are approved by the full Board and awards to senior executives are approved by the Compensation and Talent Management Committee. In certain circumstances, the Chief Executive Officer or delegate approves 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 and Sustainability 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. Alternately, expense is recognized upon death or upon grant date to certain retirement-eligible employees whose agreements allow for continued vesting upon retirement. 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.
| Fiscal Years
(Dollars in Millions) | 2021 | 2020 | 2019
Share-Based Compensation Expense |  |  |
Performance Units | $ | 71 |  | $ | (3) |  | $ | 42 |
Stock Options | 18 |  | 19 |  | 18 |
Restricted Stock Units and Awards | 12 |  | 6 |  | 8 |
Employee Stock Purchase Plan | 4 |  | 5 |  | 4 |
Stock Awards for Directors | 2 |  | 2 |  | 2 |
Total Share-based Compensation Expense | $ | 107 |  | $ | 29 |  | $ | 74 |
Income Tax Benefit | $ | 23 |  | $ | 19 |  | $ | 43 |
Long-term Incentive Plans The objective of the CSX Long-term Incentive Plans (“LTIP”) is to motivate and reward certain employees for achieving and exceeding certain financial goals. The 2021-2023 and 2020-2022 LTIP were adopted under the 2019 Stock and Incentive Award Plan and the 2019-2021 LTIP was adopted under the 2010 Stock and Incentive Award Plan. 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. NOTE 4. Stock Plans and Share-Based Compensation, continued In 2021, 2020, and 2019, target performance units were granted to certain employees under three separate LTIP plans covering three-year cycles: the 2021-2023 ("2021-2023 LTIP"), the 2020-2022 ("2020-2022 LTIP") and the 2019-2021 (“2019-2021 LTIP”) plans. Payouts of performance units for the plans will be based on the achievement of certain goals, in each case excluding non-recurring items as disclosed in the Company’s financial statements. •For the 2021-2023 LTIP plan, the average annual operating income growth percentage and cumulative free cash flow over the plan period will each comprise 50% of the payout and will be measured independently of the other. Participants will receive stock dividend equivalents declared over the performance period based on the number of performance units paid upon vesting. •For the 2020-2022 LTIP plan, the cumulative operating income and cumulative free cash flow over the plan period will each comprise 50% of the payout and will be measured independently of the other. Participants will receive stock dividend equivalents declared over the performance period based on the number of performance units paid upon vesting. •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 250%, based upon the Company’s total shareholder return relative to specified comparable groups over the performance period. The fair values of the performance units awarded during the years ended December 2021, 2020 and 2019 were calculated primarily using a Monte-Carlo simulation model with the following weighted-average assumptions:
Weighted-average assumptions used: | 2021 | 2020 | 2019
Annual dividend yield | n/a | n/a | 1.4 | %
Risk-free interest rate | 0.2 | % | 1.4 | % | 2.4 | %
Annualized volatility | 33.6 | % | 24.5 | % | 27.4 | %
Expected life (in years) | 2.9 | 2.9 | 2.8
Performance unit grant and vesting information is summarized as follows:
| Fiscal Years
| 2021 |  | 2020 |  | 2019
Weighted-average grant date fair value | $ | 30.11 |  |  | $ | 25.39 |  |  | $ | 22.06 |
Fair value of units vested in fiscal year ending (in millions) | $ | 19 |  |  | $ | 18 |  |  | $ | 17 |
NOTE 4. Stock Plans and Share-Based Compensation, continued 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, 2020 | 1,920 |  |  | $ | 23.86 |
Granted | 597 |  |  | 30.11 |
Forfeited | (59) |  |  | 24.30 |
Vested | (882) |  |  | 22.09 |
Unvested at December 31, 2021 | 1,576 |  |  | $ | 27.21 |
As of December 2021, there was $20 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 2021, 2020, and 2019 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 become exercisable in equal installments on the anniversary of the grant date over a vesting period (three-year graded). 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 option valuation 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 6.0 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). Assumptions and inputs used to estimate fair value of stock options are summarized as follows:
| Fiscal Years
| 2021 | 2020 | 2019
Weighted-average grant date fair value | $ | 7.94 |  | $ | 6.31 |  | $ | 5.96 |
Stock options valuation assumptions: |  |  |
Annual dividend yield | 1.2 | % | 1.2 | % | 1.3 | %
Risk-free interest rate | 0.7 | % | 1.4 | % | 2.4 | %
Annualized volatility | 31.2 | % | 26.1 | % | 25.7 | %
Expected life (in years) | 6.0 | 6.0 | 6.1
Other pricing model inputs: |  |  |
Weighted-average grant-date market price of CSX stock (strike price) | $ | 29.65 |  | $ | 26.53 |  | $ | 23.34 |
NOTE 4. Stock Plans and Share-Based Compensation, continued 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, 2020 | 12,652 |  |  | $ | 20.29 |  |  |  |  |
Granted | 2,005 |  |  | 29.69 |  |  |  |  |
Forfeited | (174) |  |  | 26.91 |  |  |  |  |
Exercised | (1,971) |  |  | 15.76 |  |  |  |  |
Outstanding at December 31, 2021 | 12,512 |  |  | $ | 22.42 |  |  | 7.2 |  | $ | 190 |
Exercisable at December 31, 2021 | 6,347 |  |  | $ | 18.16 |  |  | 6.1 |  | $ | 123 |
Unrecognized compensation expense related to stock options as of December 2021 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. Additional information on stock option exercises is summarized as follows:
(Dollars in Millions) | 2021 | 2020 | 2019
Intrinsic value of stock options exercised | $ | 32 |  | $ | 30 |  | $ | 87 |
Cash received from option exercises | $ | 31 |  | $ | 29 |  | $ | 45 |
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. These awards are time-based and not based upon CSX’s attainment of operational targets. Participants receive cash or stock dividend equivalents on these shares, depending on the grant. Restricted stock grant and vesting information is summarized as follows:
| Fiscal Years
| 2021 |  | 2020 |  | 2019
Weighted-average grant date fair value | $ | 29.84 |  |  | $ | 26.43 |  |  | $ | 23.06 |
Fair value of units and awards vested during fiscal year ended (in millions) | $ | 12 |  |  | $ | 8 |  |  | $ | 7 |
NOTE 4. Stock Plans and Share-Based Compensation, continued 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, 2020 | 1,055 |  |  | $ | 22.36 |
Granted | 561 |  |  | 29.84 |
Forfeited | (50) |  |  | 27.31 |
Vested | (543) |  |  | 21.26 |
Unvested at December 31, 2021 | 1,023 |  |  | $ | 27.53 |
As of December 2021, unrecognized compensation expense for these restricted stock units and awards was approximately $12 million, which will be expensed over a weighted-average remaining period of two years. Stock Awards for Directors CSX’s non-management directors receive a base annual retainer of $122,500 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 $172,500, 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. These awards are evaluated periodically by the Board of Directors. 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 12 million (split-adjusted) 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 market value 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 2021, 2020 and 2019, the Company issued the following shares under this program.
| Fiscal Years
| 2021 |  | 2020 |  | 2019
Shares issued (in thousands) | 730 |  |  | 726 |  |  | 747 |
Weighted average purchase price per share | $ | 21.90 |  |  | $ | 20.13 |  |  | $ | 17.57 |

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