SHARE-BASED COMPENSATION
At December 31, 2013, a variety of share-based compensation grants and awards were outstanding for employees (including officers). All share-based compensation plans are approved by the shareholders.
We have share-based compensation outstanding under two Long-Term Incentive Plans (“LTIP”): the 1998 LTIP and the 2008 LTIP. No further grants may be made under the 1998 LTIP. All outstanding share-based compensation under the 1998 LTIP continues to be governed by the terms and conditions of the existing agreements for those grants. Grants may continue to be made under the 2008 LTIP through April 2018. Under the 2008 LTIP, the number of shares of Common Stock that may be granted as share-based compensation in any year is limited to 2% of our issued and outstanding Common Stock as of December 31 of the prior calendar year. Any unused portion is available for later years. The limit may be increased up to 3% in any year, with a corresponding reduction in shares available for grants in future years. At December 31, 2013 the number of unused shares carried forward was 217 million shares.
We primarily issue two types of share-based compensation awards: restricted stock units (“RSUs”) and stock options.
We grant time-based and performance-based RSUs to our employees. RSUs provide the recipients with the right to shares of Common Stock after a restriction period. We measure the fair value using the closing price of our Common Stock on grant date.
Time-based RSUs generally have a graded vesting feature whereby one-third of each grant of RSUs vests after the first anniversary of the grant date, one-third after the second anniversary, and one-third after the third anniversary. Performance-based RSUs have a performance period (usually one year) followed by a restriction period (usually two years).
NOTE 20. SHARE-BASED COMPENSATION (Continued)
We also grant stock options to our employees. We measure the fair value of our stock options using the Black-Scholes option-pricing model, using historical volatility and our determination of the expected term. The expected term of stock options is the time period that the stock options are expected to be outstanding. Historical data are used to estimate option exercise behaviors and employee termination experience.
Stock options generally have a vesting feature whereby one-third of each grant of stock options are exercisable after the first anniversary of the grant date, one-third after the second anniversary, and one-third after the third anniversary. Stock options expire 10 years from the grant date.
Expense for RSUs and stock options is recorded in Selling, administrative, and other expense and is based on the fair value at grant date. RSU and stock option expense is recognized using the graded vesting method over the shorter of the vesting period or the time period an employee becomes eligible to retain the award at retirement. Performance-based RSU expense is recognized when it is probable and estimable as measured against the performance metrics over the performance and restriction periods, if any.
We measure the intrinsic value of RSUs and stock options by comparing the award price to the closing stock price at December 31.
We issue new shares of Common Stock upon vesting of RSUs and upon exercise of stock options.
Restricted Stock Units
RSU activity during 2013 was as follows (in millions, except for weighted average grant-date fair value):
|
| | | | | | | | | | |
| Shares | | Weighted- Average Grant- Date Fair Value | | Aggregate Intrinsic Value |
Outstanding, beginning of year | 18.2 |
| | $ | 13.18 |
| | |
Granted | 10.8 |
| | 12.77 |
| | |
Vested | (7.7 | ) | | 13.11 |
| | |
Forfeited | (1.0 | ) | | 12.52 |
| | |
Outstanding, end of year | 20.3 |
| | 13.11 |
| | $ | 313 |
|
RSU-stock expected to vest | 20.0 |
| | N/A |
| | 309 |
|
The fair value and intrinsic value of RSUs was as follows (in millions, except RSU per unit amounts):
|
| | | | | | | | | | | |
| 2013 | | 2012 | | 2011 |
Fair value | | | | | |
Granted | $ | 138 |
| | $ | 102 |
| | $ | 123 |
|
Weighted average for multiple grant dates (per unit) | 12.77 |
| | 12.43 |
| | 14.47 |
|
Vested | 101 |
| | 109 |
| | 141 |
|
Intrinsic value | |
| | |
| | |
|
Vested | $ | 119 |
| | $ | 329 |
| | $ | 478 |
|
Compensation cost for RSUs for the years ended December 31 was as follows (in millions):
|
| | | | | | | | | | | |
| 2013 | | 2012 | | 2011 |
Compensation cost (a) | $ | 81 |
| | $ | 62 |
| | $ | 84 |
|
__________
| |
(a) | Net of tax benefit of $48 million, $36 million, and $49 million in 2013, 2012, and 2011, respectively. |
As of December 31, 2013, there was approximately $58 million in unrecognized compensation cost related to non-vested RSUs. This expense will be recognized over a weighted average period of 1.8 years.
NOTE 20. SHARE-BASED COMPENSATION (Continued)
Stock Options
Stock option activity was as follows (in millions, except for weighted average exercise price):
|
| | | | | | | | | | | | | |
| 2013 | | 2012 |
| Shares | | Weighted- Average Exercise Price | | Shares | | Weighted- Average Exercise Price |
Outstanding, beginning of year | 108.0 |
| | $ | 9.14 |
| | 144.4 |
| | $ | 10.63 |
|
Granted | 5.9 |
| | 12.76 |
| | 6.4 |
| | 12.43 |
|
Exercised (a) | (33.1 | ) | | 9.76 |
| | (7.6 | ) | | 5.70 |
|
Expired | (1.6 | ) | | 8.26 |
| | (35.2 | ) | | 16.59 |
|
Forfeited | (0.1 | ) | | 12.80 |
| | — |
| | — |
|
Outstanding, end of year | 79.1 |
| | 9.17 |
| | 108.0 |
| | 9.14 |
|
Exercisable, end of year | 67.6 |
| | 8.53 |
| | 96.5 |
| | 8.67 |
|
__________
| |
(a) | Exercised at option prices ranging from $1.96 to $16.49 during 2013 and option prices ranging from $1.96 to $12.49 during 2012. |
The total grant date fair value of options that vested during the years ended December 31 was as follows (in millions):
|
| | | | | | | | | | | |
| 2013 | | 2012 | | 2011 |
Fair value of vested options | $ | 41 |
| | $ | 37 |
| | $ | 36 |
|
We have 67.6 million fully-vested stock options, with a weighted-average exercise price of $8.53 and average remaining term of 3.6 years. We expect 11.3 million stock options (after forfeitures), with a weighted-average exercise price of $12.89 and average remaining term of 8.6 years, to vest in the future. The intrinsic value for vested and unvested options was $466 million and $28 million, respectively, for the year ended December 31, 2013.
We received approximately $323 million in proceeds from the exercise of stock options in 2013. The tax benefit realized was $11 million. An equivalent of about $511 million in new issues were used to settle exercised options. For options exercised during the years ended December 31, 2013, 2012, and 2011, the difference between the fair value of the Common Stock issued and the respective exercise price was $188 million, $44 million, and $54 million, respectively.
Compensation cost for stock options for the years ended December 31 was as follows (in millions):
|
| | | | | | | | | | | |
| 2013 | | 2012 | | 2011 |
Compensation cost (a) | $ | 18 |
| | $ | 26 |
| | $ | 30 |
|
__________
| |
(a) | Net of tax benefit of $11 million, $16 million, and $17 million in 2013, 2012, and 2011, respectively. |
As of December 31, 2013, there was about $10 million in unrecognized compensation cost related to non-vested stock options. This expense will be recognized over a weighted-average period of 1.7 years. A summary of the status of our non-vested shares and changes during 2013 follows (in millions, except for weighted average grant-date fair value):
|
| | | | | | |
| Shares | | Weighted- Average Grant- Date Fair Value |
Non-vested, beginning of year | 11.5 |
| | $ | 6.79 |
|
Granted | 5.9 |
| | 5.03 |
|
Vested | (5.8 | ) | | 7.04 |
|
Forfeited | (0.1 | ) | | 5.30 |
|
Non-vested, end of year | 11.5 |
| | 5.78 |
|
NOTE 20. SHARE-BASED COMPENSATION (Continued)
The estimated fair value of stock options at the time of grant using the Black-Scholes option-pricing model was as follows:
|
| | | | | | | | | | | |
| 2013 | | 2012 | | 2011 |
Fair value per stock option | $ | 5.03 |
| | $ | 5.88 |
| | $ | 8.48 |
|
Assumptions: | |
| | |
| | |
|
Annualized dividend yield | 3 | % | | 2 | % | | — | % |
Expected volatility | 52.2 | % | | 53.8 | % | | 53.2 | % |
Risk-free interest rate | 1.5 | % | | 1.6 | % | | 3.2 | % |
Expected stock option term (in years) | 7.7 |
| | 7.2 |
| | 7.1 |
|
Details on various stock option exercise price ranges as of December 31, 2013 were as follows (shares in millions):
|
| | | | | | | | | | | | | | | |
| Outstanding Options | | Exercisable Options |
Range of Exercise Prices | Shares | | Weighted- Average Life (years) | | Weighted- Average Exercise Price | | Shares | | Weighted- Average Exercise Price |
$1.96 – $2.84 | 15.5 |
| | 5.2 | | $ | 2.16 |
| | 15.5 |
| | $ | 2.16 |
|
$5.11 – $8.58 | 23.2 |
| | 3.1 | | 7.29 |
| | 23.2 |
| | 7.29 |
|
$10.11 – $12.98 | 29.1 |
| | 5.3 | | 12.58 |
| | 19.1 |
| | 12.56 |
|
$13.07 – $16.64 | 11.3 |
| | 2.8 | | 13.86 |
| | 9.8 |
| | 13.71 |
|
Total stock options | 79.1 |
| | | | |
| | 67.6 |
| | |
|
