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Share-based and Deferred Compensation Plans
 12 Months Ended
Dec. 31, 2016
Compensation Related Costs [Abstract]  
Share-based and Deferred Compensation Plans Share-based and Deferred Compensation Plans

Overview

At year end 2015, we had four stock award plans in effect: the YUM! Brands, Inc. Long-Term Incentive Plan (the “LTIP”), the 1997 Long-Term Incentive Plan, the YUM! Brands, Inc. Restaurant General Manager Stock Option Plan and the YUM! Brands, Inc. SharePower Plan. In May 2016, concurrent with Shareholder approval to increase the authorized shares available for issuance under the LTIP, we cancelled authorized but unissued awards under the other three plans and will only issue new awards under the LTIP. Outstanding awards under the other plans will continue to be governed by their original award terms and will be issued under the LTIP. Under all our award terms, the exercise price of stock options and SARs granted must be equal to or greater than the average market price or the ending market price of the Company’s stock on the date of grant.

Potential awards to employees and non-employee directors under the LTIP includes stock options, incentive stock options, SARs, restricted stock, restricted stock units (“RSUs”), performance restricted stock units, performance share units (“PSUs”) and performance units.  We have issued only stock options, SARs, RSUs and PSUs under the LTIP.  While awards under the LTIP can have varying vesting provisions and exercise periods, outstanding awards under the LTIP vest in periods ranging from immediate to five years. Stock options and SARs expire ten years after grant.

At year end 2016, approximately 27 million shares were available for future share-based compensation grants under the LTIP.

Our EID Plan allows participants to defer receipt of a portion of their annual salary and all or a portion of their incentive compensation.  As defined by the EID Plan, we credit the amounts deferred with earnings based on the investment options selected by the participants.  These investment options are limited to cash, phantom shares of our Common Stock, phantom shares of a Stock Index Fund and phantom shares of a Bond Index Fund.  Investments in cash and phantom shares of both index funds will be distributed in cash at a date as elected by the employee and therefore are classified as a liability on our Consolidated Balance Sheets. We recognize compensation expense for the appreciation or the depreciation, if any, of investments in cash and both of the index funds.  Deferrals into the phantom shares of our Common Stock will be distributed in shares of our Common Stock, under the LTIP,  at a date as elected by the employee and therefore are classified in Common Stock on our Consolidated Balance Sheets.  We do not recognize compensation expense for the appreciation or the depreciation, if any, of investments in phantom shares of our Common Stock.  Our EID plan also allows certain participants to defer incentive compensation to purchase phantom shares of our Common Stock and receive a 33% Company match on the amount deferred.  Deferrals receiving a match are similar to a RSU award in that participants will generally forfeit both the match and incentive compensation amounts deferred if they voluntarily separate from employment during a vesting period that is two years from the date of deferral.  We expense the intrinsic value of the match and the incentive compensation over the requisite service period which includes the vesting period.

Historically, the Company has repurchased shares on the open market in excess of the amount necessary to satisfy award exercises and expects to continue to do so in 2017.

In connection with the Separation of our China business, under the provisions of our LTIP, employee stock options, SARs, RSUs and PSUs were adjusted to maintain the pre-spin intrinsic value of the awards. Depending on the tax laws of the country of employment, awards were modified using either the shareholder method or the employer method. Share issuances for Yum China awards held by YUM employees will be satisfied by Yum China. Share issuances for YUM awards held by Yum China employees will be satisfied by YUM. Share-based compensation for YUM employees is based on both YUM and Yum China awards held by those employees.

The shareholder method was based on the premise that employees holding YUM awards prior to the Separation should receive an equal number of awards of both YUM and Yum China. For stock options and SARs, exercise prices of these post-Separation
YUM and Yum China awards were established that, on a combined basis, maintained the intrinsic value on the YUM award prior to the Separation. The exercise prices provided for an initial intrinsic value in each of the post-Separation YUM and YUM China awards that was proportionate to the market value of the two companies on November 1, 2016. For RSUs and PSUs modified under the shareholder method, each YUM award was modified into one YUM award and one Yum China award.

Under the employer method, employees holding YUM awards prior to the Separation had their awards converted into awards of the company that they worked for subsequent to the Separation. For stock options and SARs modified under the employer method, the exercise prices of the awards were modified to maintain the pre-Separation intrinsic value of the awards in relation to the post-Separation stock price of the applicable company. For RSUs and PSUs modified under the employer method, the number of awards was modified to maintain the pre-Separation intrinsic value of the awards in relation to the post-Separation stock price of the applicable company.

As a result of the modifications made to outstanding awards under our shared-based and deferred compensation plans as described above, the total number of YUM stock option and SAR awards decreased by approximately 1.3 million shares. The total number of YUM RSU and PSU awards did not change significantly. The modifications to the outstanding equity awards resulted in an insignificant amount of additional compensation expense.

Investments in phantom shares of our Common Stock held within our EID Plan by employees that remained with YUM post-Separation that were converted into phantom investments in Yum China will now be allowed to be transferred into cash, phantom shares of a Stock Index Fund and phantom shares of a Bond Index Fund within the EID Plan. As such, distributions of current investments in phantom shares of Yum China may now be paid in cash at a date as elected by the employee and therefore are classified as a liability on our Consolidated Balance Sheets. At the Separation date and subsequent to the spinoff through December 31, 2016, we recorded G&A expense related to the cumulative mark-to-market value of these awards in excess of previously recorded fair value charges totaling $28 million. Awards that are remaining in the Yum China investment option when they are due for distribution will be paid out in shares of Yum China stock.

Award Valuation

We estimated the fair value of each stock option and SAR award as of the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

 
 
2016
 
2015
 
2014
Risk-free interest rate
 
1.4
%
 
1.3
%
 
1.6
%
Expected term (years)
 
6.4 years

 
6.4 years

 
6.2 years

Expected volatility
 
27.0
%
 
26.9
%
 
29.7
%
Expected dividend yield
 
2.6
%
 
2.2
%
 
2.1
%


The above table does not reflect valuations performed in connection with modifications to awards made in connection with the Separation. All option and SAR awards granted during 2016 occurred prior to the Separation.

We believe it is appropriate to group our stock option and SAR awards into two homogeneous groups when estimating expected term.  These groups consist of grants made primarily to restaurant-level employees, which cliff-vest after 4 years and expire 10 years after grant, and grants made to executives, which typically have a graded vesting schedule of 25% per year over 4 years and expire 10 years after grant.  We use a single weighted-average term for our awards that have a graded vesting schedule.  Based on analysis of our historical exercise and post-vesting termination behavior, we have determined that our restaurant-level employees and our executives exercised the awards on average after 4.75 years and 6.5 years, respectively.

When determining expected volatility, we consider both historical volatility of our stock as well as implied volatility associated with our publicly traded options.  The expected dividend yield is based on the annual dividend yield at the time of grant.

The fair values of RSU awards are based on the closing price of our Common Stock on the date of grant. The fair values of PSU awards with market-based conditions have been valued based on the outcome of a Monte Carlo simulation.

Award Activity

Stock Options and SARs

 
 
Shares
(in thousands)
 
Weighted-Average Exercise
Price(a)
 
Weighted- Average Remaining Contractual Term (years)(a)
 
Aggregate Intrinsic Value (in millions)
Outstanding at the beginning of the year
 
25,933

 
 
 
$
51.79

 
 
 
 
Granted
 
4,329

 
 
 
70.64

 
 
 
 
Exercised
 
(5,886
)
 
 
 
40.84

 
 
 
 
Forfeited or expired
 
(1,101
)
 
 
 
70.66

 
 
 
 
Outstanding at October 31, 2016
 
23,275

 
 
 
57.20

 
 
 
 
Equitable adjustment
 
(1,283
)
(b) 
 
 
 
 
 
 
 
Exercised
 
(631
)
 
 
 
24.66

 
 
 
 
Forfeited or expired
 
(119
)
 
 
 
52.13

 
 
 
 
Outstanding at the end of the year
 
21,242

(c) 
 
 
$
40.78

 
5.63

 
$
479

Exercisable at the end of the year
 
13,710

 
 
 
$
35.37

 
4.21

 
$
383


(a)
Activity and amounts that occurred after October 31, 2016 reflect modifications related to the Separation.

(b)
Adjustment to maintain intrinsic value upon Separation.

(c)
Outstanding awards include 1,341 options and 19,901 SARs with weighted average exercise prices of $33.33 and $41.28, respectively. Outstanding awards represent YUM awards held by employees of both YUM and Yum China.

The weighted-average grant-date fair value of stock options and SARs granted during 2016, 2015 and 2014 was $14.40, $15.95 and $17.28, respectively.  The total intrinsic value of stock options and SARs exercised during the years ended December 31, 2016, December 26, 2015 and December 27, 2014, was $263 million, $153 million and $141 million, respectively.

As of December 31, 2016, $61 million of unrecognized compensation cost related to unvested stock options and SARs, which will be reduced by any forfeitures that occur, is expected to be recognized over a remaining weighted-average period of approximately 1.8 years.  This reflects unrecognized cost for both YUM and Yum China awards held by YUM employees. The total fair value at grant date of awards that vested during 2016, 2015 and 2014 was $41 million, $42 million and $34 million, respectively.

RSUs and PSUs

As of December 31, 2016, there was $21 million of unrecognized compensation cost related to 0.9 million unvested RSUs and PSUs.

Impact on Net Income

The components of share-based compensation expense and the related income tax benefits are shown in the following table:

 
 
2016
 
2015
 
2014
Options and SARs
 
$
38

 
$
41

 
$
39

Restricted Stock Units
 
38

 
3

 
5

Performance Share Units
 
4

 
2

 
1

Total Share-based Compensation Expense
 
$
80

(a) 
$
46

 
$
45

Deferred Tax Benefit recognized
 
$
26

 
$
15

 
$
14

 
 
 
 
 
 
 
EID compensation expense not share-based
 
$
5

 
$
1

 
$
8



(a)    Includes $30 million due to modifications of awards in connection with the Separation that was not allocated to any of our operating segments for performance purposes. See Note 5.

Cash received from stock option exercises for 2016, 2015 and 2014, was $5 million, $12 million and $29 million, respectively.  Tax benefits realized on our tax returns from tax deductions associated with share-based compensation for 2016, 2015 and 2014 totaled $109 million, $62 million and $58 million, respectively.