Share-Based Compensation

We have a share-based compensation program for employees and non-employee directors. 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 and nine months ended September 30, 2018 and 2017 in the Condensed Consolidated Statements of Income:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
	(in millions)
Share-based compensation expense before income taxes	$	18		$	18		$	51		$	52
Income tax benefit	(5		)	(7		)	(14		)	(21		)
Share-based compensation expense after income taxes	$	13		$	11		$	37		$	31

Common Shares Available Under Our Equity Plan

As of September 30, 2018, we had approximately 11.0 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 stock 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. Granted but unvested shares are generally forfeited upon termination of employment.

Summary of Restricted Stock Activity

The following table summarizes our restricted stock activity for the nine months ended September 30, 2018:



	Restricted Stock
	Number of Awards		Weighted-Average Grant Date Fair Value

Unvested balances at January 1, 2018	1,988,500		$	57.34
Granted	489,203		$	81.77
Vested	(669,577	)	$	47.54
Forfeited	(229,214	)	$	63.29
Unvested balances at September 30, 2018	1,578,912		$	68.20

As of September 30, 2018, $58 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

PSUs are based on performance measures that impact the amount of shares that each recipient will receive upon vesting. 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

The grant date fair value of PSUs under the one-year performance-based program is based on the closing stock price at the date of grant less the present value of future cash dividends. Under this program, an eligible employee receives a target grant of PSUs, but 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 one-year performance period. Compensation cost is recognized over the performance period and the three-year vesting period based on the probability that such performance measures will be achieved, taking into account an estimated forfeiture rate. Granted but unvested shares are generally forfeited upon termination of employment.

During 2017, certain grants of PSUs with a one-year performance period exceeded the applicable performance parameters. As a result, an additional 14,497 units above target were considered granted in the first quarter of 2018 and are included in the below table.

Three-Year PSU Program

Under the three-year performance-based program, each eligible individual receives PSUs, subject to market conditions, 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, taking into account an estimated forfeiture rate, regardless of whether the market condition is satisfied, provided that the requisite service period has been completed. Granted but unvested shares are generally forfeited upon termination of employment. 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 PSUs 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 2015 with a three-year performance period exceeded the applicable performance parameters. As a result, an additional 237,876 units above target were considered granted in the first quarter of 2018 and are included in the below table.

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:



	Nine Months Ended September 30,
	2018		2017

Weighted-average risk free interest rate⁽¹⁾	2.36	%	1.44	%
Expected volatility⁽²⁾	18.7	%	19.2	%
Weighted-average grant date share price	$86.24		$69.45
Weighted-average fair value at grant date	$116.86		$81.57

____________


⁽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 nine months ended September 30, 2018:



	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, 2018	333,004		$	61.39	1,009,958		$	78.18
Granted⁽¹⁾	132,019		$	80.36	484,075		$	90.92
Vested	(6,702	)	$	49.40	(655,204	)	$	64.08
Forfeited	(22,650	)	$	60.84	—		$	—
Unvested balances at September 30, 2018	435,671		$	67.35	838,829		$	96.55

____________


⁽¹⁾	Includes target awards granted and certain additional awards granted based on overachievement of performance parameters.

As of September 30, 2018, $12 million of total unrecognized compensation cost related to the one-year PSU program is expected to be recognized over a weighted-average period of 1.5 years. For the three-year PSU program, $34 million of total unrecognized compensation cost is expected to be recognized over a weighted-average period of 1.5 years.

Stock Options

No stock option awards were granted during the nine months ended September 30, 2018.

In January 2017, our CEO received 268,817 performance-based non-qualified stock options which will vest annually over a three-year period, with each vesting contingent upon the achievement of annual performance parameters. On January 30, 2018, Nasdaq's management compensation committee and board of directors determined that the performance goal for 2017 was met, resulting in the settlement of the first one-third of the grant.

The weighted-average grant date fair value was $66.68. We estimated the fair value of this stock option award using the Black-Scholes valuation model using the following assumptions:



Expected life (in years)	6
Weighted-average risk free interest rate	2.1	%
Expected volatility	25.6	%
Dividend yield	1.92	%

Our computation of expected life was based on an estimate of the average length of time between option grant and exercise. The interest rate for periods within the expected life of the award was based on the U.S. Treasury yield curve in effect at the time of grant. Our computation of expected volatility was an estimate of the future upward/downward fluctuations in the underlying share price. We used Nasdaq's historical volatility for the trailing 6-year period as of the grant date. Our computation of dividend yield was based on annualized dividends expressed as a percentage of share price.

Summary of Stock Option Activity

A summary of stock option activity for the nine months ended September 30, 2018 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, 2018	571,380		$	43.84	5.40	$	19
Exercised	(99,953	)	24.52
Forfeited	(3,182	)	26.86
Outstanding at September 30, 2018	468,245		$	48.08	5.48	$	18
Exercisable at September 30, 2018	289,033		$	36.55	3.83	$	14

The net cash proceeds from the exercise of 11,953 stock options for the three months ended September 30, 2018 was immaterial. We received net cash proceeds of $2 million from the exercise of 99,953 stock options for the nine months ended September 30, 2018. We received net cash proceeds of $1 million from the exercise of 40,160 stock options for the three months ended September 30, 2017 and received net cash proceeds of $24 million from the exercise of 1,074,321 stock options for the nine months ended September 30, 2017.

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 September 28, 2018 of $85.80 and the exercise price, times the number of shares) based on stock options with an exercise price less than Nasdaq’s closing price of $85.80 as of September 28, 2018, 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 September 30, 2018 was 0.3 million and the weighted-average exercise price was $36.55. As of September 30, 2017, 0.3 million outstanding stock options were exercisable and the weighted-average exercise price was $23.77.

The total pre-tax intrinsic value of stock options exercised was $1 million for the three months ended September 30, 2018, $2 million for the three months ended September 30, 2017, $6 million for the nine months ended September 30, 2018, and $53 million for the nine months ended September 30, 2017.

ESPP

We have an ESPP under which approximately 2.0 million shares of our common stock have been reserved for future issuance as of September 30, 2018. 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 September 30, 2018 and 2017 and $3 million for both the nine months ended September 30, 2018 and 2017.