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Share-Based Compensation Plans | 12 Months Ended
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Dec. 31, 2021
Share-based Payment Arrangement [Abstract] |
Share-Based Compensation Plans | Share-Based Compensation Plans Our share-based compensation program is a broad-based program designed to attract and retain employees while also aligning employees’ interests with the interests of our shareholders. In addition, members of our Board of Directors participate in our share-based compensation program in connection with their service on our board. Share-based awards issued to employees include non-qualified stock options, restricted stock unit awards and performance share unit awards. Under the 2011 Omnibus Incentive Plan, the number of shares initially available for awards was 18 million. As of December 31, 2021, there were approximately 4 million shares of common stock available for future grants. Total share-based compensation costs recognized for 2021, 2020 and 2019 were $33 million, $26 million, and $29 million, respectively. The unamortized compensation expense at December 31, 2021 related to our stock options, restricted share units and performance share units was $7 million, $23 million and $13 million, respectively, and is expected to be recognized over a weighted average period of 1.7, 1.8 and 2.5 years, respectively. The amount of cash received from the exercise of stock options was $19 million for 2021 with a tax benefit of $6 million realized associated with stock option exercises and vesting of restricted stock units. We classify as an operating activity the cash flows attributable to excess tax benefits arising from stock option exercises and restricted stock unit vestings. Stock Option Grants Options are awarded with a contractual term of 10 years and generally vest over a three-year period and are exercisable within the contractual term, except in certain instances of termination due to death, retirement, disability and other limited circumstances in accordance with the terms of the grant agreements. The exercise price per share is the fair market value of the underlying common stock on the date each option is granted. At December 31, 2021, there were options to purchase an aggregate of 1.8 million shares of common stock. The following is a summary of the changes in outstanding stock options for 2021:
| Share units (in thousands) |  | Weighted Average Exercise Price / Share |  | Weighted Average Remaining Contractual Term (Years) |  | Aggregate Intrinsic Value (in millions)
Outstanding at January 1, 2021 | 1,961 |  |  | $ | 56.08 |  |  | 6.3 |  |
Granted | 262 |  |  | 102.61 |  |  |  |  |
Exercised | (371) |  |  | 50.12 |  |  |  |  |
Forfeited and expired | (25) |  |  | 84.72 |  |  |  |  |
Outstanding at December 31, 2021 | 1,827 |  |  | $ | 64.12 |  |  | 6.1 |  | $ | 102 |
Options exercisable at December 31, 2021 | 1,173 |  |  | $ | 52.69 |  |  | 4.8 |  | $ | 79 |
Vested and non-vested expected to vest as of December 31, 2021 | 1,778 |  |  | $ | 63.46 |  |  | 6.1 |  | $ | 100 |
The amount of non-vested options outstanding was 0.7 million, 0.7 million and 0.6 million at a weighted average grant date share price of $84.66, $74.00 and $69.30 as of December 31, 2021, 2020 and 2019, respectively. The total intrinsic value of options exercised (which is the amount by which the stock price exceeded the exercise price of the options on the date of exercise) during 2021, 2020 and 2019 was $27 million, $20 million and $15 million, respectively. The fair value of each option grant was estimated on the date of grant using the binomial lattice pricing model which incorporates multiple and variable assumptions over time, including assumptions such as employee exercise patterns, stock price volatility and changes in dividends. The following are weighted-average assumptions used for 2021, 2020, and 2019:
| 2021 |  | 2020 |  | 2019
Dividend yield | 1.10 | % |  | 1.42 | % |  | 1.30 | %
Volatility | 26.29 | % |  | 24.16 | % |  | 24.10 | %
Risk-free interest rate | 0.86 | % |  | 0.83 | % |  | 2.55 | %
Expected term (in years) | 5.7 |  | 5.8 |  | 5.4
Weighted-average fair value per option | $ | 23.26 |  |  | $ | 14.84 |  |  | $ | 17.04 |
Expected volatility is calculated based on an analysis of historic volatility measures for Xylem. We use historical data to estimate option exercise and employee termination behavior within the valuation model. Employee groups and option characteristics are considered separately for valuation purposes. The expected term represents an estimate of the period of time options are expected to remain outstanding. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of option grant. Restricted Stock Unit Grants Restricted stock units granted to employees vest over a three-year period. Prior to the time a restricted share becomes fully vested, the awardees cannot transfer, pledge or encumber such shares. Prior to the time a restricted share is fully vested, the awardees do not have certain rights of a stockholder, such as the right to vote and receive dividends; however, dividends accrue during the vesting period and are paid upon vesting. If an employee leaves prior to vesting, whether through resignation or termination for cause, the restricted stock unit and related accrued dividends are forfeited. If an employee retires, a pro-rata portion of the restricted stock unit may vest in accordance with the terms of the grant agreements. Restricted stock units granted to Board members become fully vested upon the day prior to the next annual meeting. The fair value of the restricted stock unit awards is determined using the closing price of our common stock on date of grant. The following is a summary of the changes in outstanding restricted stock units for 2021:
| Share Units (in thousands) |  | Weighted Average Grant Date Fair Value / Share
Outstanding at January 1, 2021 | 537 |  |  | $ | 74.62 |
Granted | 230 |  |  | 105.77 |
Vested | (252) |  |  | 74.61 |
Forfeited | (31) |  |  | 87.52 |
Outstanding at December 31, 2021 | 484 |  |  | $ | 88.47 |
Performance Share Units Performance share units granted under the long-term incentive plan vest based upon performance by the Company over a three-year period against targets approved by the Leadership Development & Compensation Committee of the Company's Board of Directors prior to the grant date. For the performance periods, the performance share units were granted at a target of 100% with actual payout contingent upon the achievement of a pre-set, three-year adjusted ROIC and cumulative adjusted net income performance target for ROIC performance share units and a relative TSR performance for TSR performance share units. The calculated compensation cost for ROIC performance share units is adjusted based on an estimate of awards ultimately expected to vest and our assessment of the probable outcome of the performance condition. ROIC Performance Share Unit Grants The fair value of the ROIC performance share unit awards is determined using the closing price of our common stock on date of grant. The following is a summary of the changes in outstanding ROIC performance share units for 2021:
| Share units (in thousands) |  | Weighted Average Grant Date Fair Value / Share
Outstanding at January 1, 2021 | 182 |  |  | $ | 76.12 |
Granted | 61 |  |  | 102.69 |
Forfeited | (66) |  |  | 76.18 |
Outstanding at December 31, 2021 | 177 |  |  | $ | 84.84 |
(a) Represents an increase in the number of original ROIC performance share units awarded based on the final performance criteria achievement at the end of the performance period of such awards. TSR Performance Share Unit Grants The following is a summary of the changes in outstanding TSR performance share units for 2021:
| Share units (in thousands) |  | Weighted Average Grant Date Fair Value / Share
Outstanding at January 1, 2021 | 182 |  |  | $ | 96.98 |
Granted | 61 |  |  | 117.56 |
Adjustment for Market Condition Achieved (a) | 35 |  |  | 98.79 |
Vested | (93) |  |  | 98.79 |
Forfeited | (8) |  |  | 103.34 |
Outstanding at December 31, 2021 | 177 |  |  | $ | 102.96 |
(a) Represents an increase in the number of original TSR performance share units awarded based on the final market condition achievement at the end of the performance period of such awards. The fair value of TSR performance share units were calculated on the date of grant using a Monte Carlo simulation model utilizing several key assumptions, including expected Company and peer company share price volatility, correlation coefficients between peers, the risk-free rate of return, the expected dividend yield and other award design features. The following are weighted-average key assumptions for 2021 grants.
| 2021 |  | 2020 |  | 2019
Volatility | 33.5 | % |  | 22.6 | % |  | 20.9 | %
Risk-free interest rate | 0.24 | % |  | 1.08 | % |  | 2.52 | %
ESG Performance Share Unit Grants During the first quarter of 2021, we issued a special grant of less than 0.1 million ESG performance share units. The shares will vest on March 1, 2026 based on our performance as of December 31, 2025 against certain of the Company's 2025 sustainability goals.

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