Share-Based Compensation

We have a share-based compensation program that provides our board of directors broad discretion in creating employee equity incentives. Share-based awards granted under this program include stock options, restricted stock (consisting of restricted stock units), and PSUs. For accounting purposes, we consider PSUs to be a form of restricted stock.

Summary of Share-Based Compensation Expense

The following table shows the total share-based compensation expense resulting from equity awards and the 15.0% discount for the ESPP for the three months ended March 31, 2017 and 2016 in the Condensed Consolidated Statements of Income:



	Three Months Ended March 31,
	2017			2016
	(in millions)
Share-based compensation expense before income taxes	$	15		$	16
Income tax benefit	(6		)	(7		)
Share-based compensation expense after income taxes	$	9		$	9

Common Shares Available Under Our Equity Plan

As of March 31, 2017, we had approximately 5.6 million shares of common stock authorized for future issuance under our Equity Plan.

Restricted Stock

We grant restricted stock to most active employees. The grant date fair value of restricted stock awards is based on the closing price at the date of grant less the present value of future cash dividends. Restricted stock awards granted generally vest 25.0% on the second anniversary of the grant date, 25.0% on the third anniversary of the grant date, and 50.0% on the fourth anniversary of the grant date. We generally recognize compensation expense for restricted stock awards on a straight-line basis over the requisite service period of the award, taking into account an estimated forfeiture rate.

Summary of Restricted Stock Activity

The following table summarizes our restricted stock activity for the three months ended March 31, 2017:



	Restricted Stock
	Number of Awards		Weighted-Average Grant Date Fair Value
Unvested balances at January 1, 2017	2,560,578		$	45.92
Granted	559,698		65.92
Vested	(343,633	)	42.83
Forfeited	(79,164	)	46.48
Unvested balances at March 31, 2017	2,697,479		$	50.45

At March 31, 2017, $69 million of total unrecognized compensation cost related to restricted stock is expected to be recognized over a weighted-average period of 1.9 years.

PSUs

The grant date fair value of PSUs is based on the closing price at the date of grant less the present value of future cash dividends. PSUs are based on performance measures that impact the amount of shares that each recipient will receive upon vesting. We report the target number of PSUs granted, unless we have determined that it is more likely than not, based on the actual achievement of performance measures, that an employee will receive a different amount of shares underlying the PSUs, in which case we report the amount of shares the employee is likely to receive. We have two performance-based long-term PSU programs for certain officers, a one-year performance-based program and a three-year cumulative performance-based program that focuses on TSR.

One-Year PSU Program

Under the one-year performance-based program, an employee may receive from 0.0% to 150.0% of the target amount granted, depending on the achievement of performance measures. These awards vest ratably on an annual basis over a three-year period commencing with the end of the performance period. Compensation cost is recognized over the performance period and the three-year vesting period, taking into account an estimated forfeiture rate.

During 2016, certain grants of PSUs with a one-year performance period exceeded the applicable performance parameters. As a result, an additional 56,533 units above target were considered granted in the first quarter of 2017.

Three-Year PSU Program

Under the three-year performance-based program, each individual receives PSUs with a three-year cumulative performance period that vest at the end of the performance period. Compensation cost is recognized over the three-year vesting period. Performance will be determined by comparing Nasdaq’s TSR to two peer groups, each weighted 50.0%. The first peer group consists of exchange companies, and the second peer group consists of all companies in the S&P 500. Nasdaq’s relative performance ranking against each of these groups will determine the final number of shares delivered to each individual under the program. The payout under this program will be between 0.0% and 200.0% of the number of PSUs granted and will be determined by Nasdaq’s overall performance against both peer groups. However, if Nasdaq’s TSR is negative for the three-year performance period, regardless of TSR ranking, the payout will not exceed 100.0% of the number of PSUs granted. We estimate the fair value of PSU’s granted under the three-year PSU program using the Monte Carlo simulation model, as these awards contain a market condition.

Certain grants of PSUs that were issued in 2014 with a three-year performance period exceeded the applicable performance parameters. As a result, an additional 538,892 units above target were considered granted in the first quarter of 2017.

The following weighted-average assumptions were used to determine the weighted-average fair values of the PSU awards granted under the three-year PSU program for the three months ended March 31, 2017 and 2016:



	Three Months Ended March 31,
	2017		2016
Weighted-average risk free interest rate⁽¹⁾	1.44	%	0.84	%
Expected volatility⁽²⁾	19.2	%	21.0	%
Weighted-average grant date share price	$69.45		$66.38
Weighted-average fair value at grant date	$81.57		$93.30

____________


⁽¹⁾	The risk-free interest rate for periods within the expected life of the award is based on the U.S. Treasury yield curve in effect at the time of grant.


⁽²⁾	We use historic volatility for PSU awards issued under the three-year PSU program, as implied volatility data could not be obtained for all the companies in the peer groups used for relative performance measurement within the program.

In addition, the annual dividend assumption utilized in the Monte Carlo simulation model is based on Nasdaq’s dividend yield at the date of grant.

Summary of PSU Activity

The following table summarizes our PSU activity for the three months ended March 31, 2017:



	PSUs
	One-Year Program				Three-Year Program
	Number of Awards		Weighted-Average Grant Date Fair Value		Number of Awards		Weighted-Average Grant Date Fair Value
Unvested balances at January 1, 2017	378,766		$	52.55	1,314,668		$	63.18
Granted	193,710		65.50		801,448		55.49
Vested	(10,729	)	53.72		(1,079,925	)	42.83
Forfeited	(25,782	)	53.89		(24,178	)	88.98
Unvested balances at March 31, 2017	535,965		$	57.14	1,012,013		$	78.19

At March 31, 2017, $16 million of total unrecognized compensation cost related to the one-year PSU program is expected to be recognized over a weighted-average period of 1.6 years. For the three-year PSU program, $38 million of total unrecognized compensation cost is expected to be recognized over a weighted-average period of 1.6 years.

Stock Options

The fair value of stock options are estimated using the Black-Scholes option-pricing model. Each grant has a 10-year life. In 2017, our CEO received 268,817 performance-based non-qualified stock options which will vest annually over a three-year period, starting at the date of the grant with each vesting contingent upon the achievement of performance parameters. There were no stock option awards granted for the three months ended March 31, 2016.

Summary of Stock Option Activity

A summary of stock option activity for the three months ended March 31, 2017 is as follows:



	Number of Stock Options		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in millions)

Outstanding at January 1, 2017	1,406,371		$	22.32	2.65	$	63
Granted	268,817		66.68
Exercised	(40,416	)	20.98
Outstanding at March 31, 2017	1,634,772		$	29.64	3.62	$	65
Exercisable at March 31, 2017	1,365,955		$	22.35	2.44	$	64

We received net cash proceeds of $1 million from the exercise of 40,416 stock options for the three months ended March 31, 2017 and received net cash proceeds of $2 million from the exercise of 86,811 stock options for the three months ended March 31, 2016.

The aggregate intrinsic value in the above table represents the total pre-tax intrinsic value (i.e., the difference between our closing stock price on March 31, 2017 of $69.45 and the exercise price, times the number of shares) based on stock options with an exercise price less than Nasdaq’s closing price of $69.45 as of March 31, 2017, which would have been received by the option holders had the option holders exercised their stock options on that date. This amount can change based on the fair market value of our common stock. The total number of in-the-money stock options exercisable as of March 31, 2017 was 1.4 million. As of March 31, 2016, 2.5 million outstanding stock options were exercisable and the weighted-average exercise price was $27.87.

The total pre-tax intrinsic value of stock options exercised was $2 million for the three months ended March 31, 2017 and $3 million for the three months ended March 31 2016.

ESPP

We have an ESPP under which approximately 2.3 million shares of our common stock have been reserved for future issuance as of March 31, 2017. Under our ESPP, employees may purchase shares having a value not exceeding 10.0% of their annual compensation, subject to applicable annual Internal Revenue Service limitations. We record compensation expense related to the 15.0% discount that is given to our employees which totaled $1 million for both the three months ended March 31, 2017 and 2016.