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Share-Based Compensation
 12 Months Ended
Dec. 31, 2018
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
Share-Based Compensation
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 years ended December 31, 2018, 2017 and 2016 in the Consolidated Statements of Income:
 
Year Ended December 31,
 
2018
 
2017
 
2016
 
(in millions)
Share-based compensation expense before income taxes
$
69

 
$
70

 
$
86

Income tax benefit
(19
)
 
(29
)
 
(35
)
Share-based compensation expense after income taxes
$
50

 
$
41

 
$
51


Common Shares Available Under Our Equity Plan
As of December 31, 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.
Summary of Restricted Stock Activity
The following table summarizes our restricted stock activity for the years ended December 31, 2018, 2017 and 2016:
 
Restricted Stock
 
Number of Awards
 
Weighted-Average Grant Date Fair Value
 
 
 
 
Unvested balances at December 31, 2015
3,343,738

 
$
35.36

Granted
724,200

 
$
62.91

Vested
(1,238,980
)
 
$
27.91

Forfeited
(268,380
)
 
$
43.29

Unvested balances at December 31, 2016
2,560,578

 
$
45.92

Granted
737,864

 
$
67.48

Vested
(1,102,823
)
 
$
38.56

Forfeited
(207,119
)
 
$
52.29

Unvested balances at December 31, 2017
1,988,500

 
$
57.34

Granted
550,544

 
$
81.66

Vested
(702,832
)
 
$
48.64

Forfeited
(252,837
)
 
$
63.86

Unvested balances at December 31, 2018
1,583,375

 
$
68.62


As of December 31, 2018, $55 million of total unrecognized compensation cost related to restricted stock is expected to be recognized over a weighted-average period of 1.8 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.
During 2018, certain grants of PSUs with a one-year performance period exceeded the applicable performance parameters. As a result, an additional 51,914 units above target were considered granted in the first quarter of 2019.
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. 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 2016 with a three-year performance period exceeded the applicable performance parameters. As a result, an additional 99,622 units above target were considered granted in the first quarter of 2019.
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:
 
Year Ended December 31,
 
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 years ended December 31, 2018, 2017 and 2016:
 
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 December 31, 2015
423,967

 
$
41.34

 
1,439,718

 
$
49.41

Granted(1)
242,642

 
$
58.33

 
761,501

 
$
66.89

Vested
(242,793
)
 
$
39.63

 
(879,926
)
 
$
43.81

Forfeited
(45,050
)
 
$
47.72

 
(6,625
)
 
$
69.11

Unvested balances at December 31, 2016
378,766

 
$
52.55

 
1,314,668

 
$
63.18

Granted(1)
197,075

 
$
65.51

 
803,712

 
$
55.57

Vested
(202,073
)
 
$
49.93

 
(1,079,925
)
 
$
42.83

Forfeited
(40,764
)
 
$
55.92

 
(28,497
)
 
$
87.86

Unvested balances at December 31, 2017
333,004

 
$
61.39

 
1,009,958

 
$
78.18

Granted(1)
177,831

 
$
80.97

 
484,075

 
$
90.92

Vested
(170,257
)
 
$
58.49

 
(655,204
)
 
$
64.08

Forfeited
(26,347
)
 
$
61.83

 
(1,079
)
 
$
81.57

Unvested balances at December 31, 2018
314,231

 
$
74.01

 
837,750

 
$
96.57


____________
(1) 
Includes target awards granted and certain additional awards granted based on overachievement of performance parameters.
As of December 31, 2018, $14 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, $28 million of total unrecognized compensation cost is expected to be recognized over a weighted-average period of 1.4 years.
Stock Options
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 29, 2019, Nasdaq's management compensation committee and board of directors determined that the performance goal for 2018 was met, resulting in the settlement of the second one-third of the grant. There were no stock option awards granted during the years ended December 31, 2018 and 2016.
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 years ended December 31, 2018, 2017 and 2016 is as follows:
 
Number of Stock Options
 
Weighted-Average Exercise Price
 
 
 
 
Outstanding at December 31, 2015
2,626,487

 
$
27.74

Exercised
(1,219,820
)
 
34.00

Forfeited
(296
)
 
23.31

Outstanding at December 31, 2016
1,406,371

 
$
22.32

Granted
268,817

 
66.68

Exercised
(1,102,830
)
 
21.98

Forfeited
(978
)
 
21.33

Outstanding at December 31, 2017
571,380

 
$
43.84

Exercised
(118,094
)
 
24.44

Forfeited
(5,570
)
 
25.29

Outstanding at December 31, 2018
447,716

 
$
49.19

Exercisable at December 31, 2018
268,504

 
$
37.51

We received net cash proceeds of $3 million from the exercise of 118,094 stock options for the year ended December 31, 2018, received net cash proceeds of $24 million from the exercise of 1,102,830 stock options for the year ended December 31, 2017, and received net cash proceeds of $41 million from the exercise of 1,219,820 stock options for the year ended December 31, 2016.

The following table summarizes significant ranges of outstanding and exercisable stock options as of December 31, 2018:
 
 
 
 
Outstanding
 
Exercisable
Range of Exercise Prices
 
Number of
Stock Options
 
Weighted-Average Remaining
Contractual Term (in years)
 
Weighted-Average
Exercise Price
 
Aggregate Intrinsic
Value (in millions)
 
Number Exercisable
 
Weighted-Average Remaining
Contractual Term (in years)
 
Weighted-Average
Exercise Price
 
Aggregate Intrinsic
Value (in millions)
$
18.67

-
$
20.10

 
76,844

 
1.17
 
$
19.74

 
$
5

 
76,844

 
1.17
 
$
19.74

 
$
5

$
25.28

-
$
66.68

 
370,872

 
6.42
 
55.29

 
10

 
191,660

 
4.94
 
44.64

 
7

Total
 
 
 
447,716

 
5.52
 
$
49.19

 
$
15

 
268,504

 
3.86
 
$
37.51

 
$
12



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 December 31, 2018 of $81.57 and the exercise price, times the number of shares) based on stock options with an exercise price less than Nasdaq’s closing price of $81.57 as of December 31, 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 December 31, 2018 was 0.3 million and the weighted-average exercise price was $37.51. As of December 31, 2017, 0.3 million outstanding stock options were exercisable and the weighted-average exercise price was $23.55. 
The total pre-tax intrinsic value of stock options exercised was $7 million during 2018, $54 million during 2017 and $40 million during 2016. 
ESPP
We have an ESPP under which approximately 1.9 million shares of our common stock have been reserved for future issuance as of December 31, 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. The following table summarizes employee activity and expenses associated with the ESPP for the years ended December 31, 2018, 2017 and 2016.
 
Year Ended December 31,
 
2018
 
2017
 
2016
Number of shares purchased by employees
205,785

 
235,859

 
233,464

Weighted-average price of shares purchased
$
66.79

 
$
58.26

 
$
50.39

Compensation expenses
$
3

 
$
3

 
$
4