NOTE 11

Stock Plans

Stock Option and Award Programs

Under the 2007 Incentive Compensation Plan and previously under the 1998 Incentive Compensation Plan, awards may be granted to employees and other key individuals who perform services for the Company and its participating subsidiaries. These awards may be in the form of stock options, restricted stock awards or units (RSAs), portfolio grants (PGs) or other incentives, and similar awards designed to meet the requirements of non-U.S. jurisdictions.

For the Company’s Incentive Compensation Plans, there were a total of 33 million common shares unissued and available for grant as of December 31, 2015, and 35 million common shares unissued and available for grant as of December 31, 2014 and 2013, as authorized by the Company’s Board of Directors and shareholders.

A summary of stock option and RSA activity as of December 31, 2015, and changes during the year is presented below:

Outstanding as of December 31, 2014, includes CEO market-based stock options of 687,000 that were previously disclosed separately.

The Company recognizes the cost of employee stock awards granted in exchange for employee services based on the grant-date fair value of the award, net of expected forfeitures. Those costs are recognized ratably over the vesting period.

Stock Options

Each stock option has an exercise price equal to the market price of the Company’s common stock on the date of grant and a contractual term of 10 years from the date of grant. Stock options generally vest 100 percent on the third anniversary of the grant date.

The weighted-average remaining contractual life and the aggregate intrinsic value (the amount by which the fair value of the Company’s stock exceeds the exercise price of the option) of the stock options outstanding, exercisable, vested, and expected to vest as of December 31, 2015, are as follows:

The intrinsic value of options exercised during 2015, 2014 and 2013 was $87 million, $245 million and $374 million, respectively, (based upon the fair value of the Company’s stock price at the date of exercise). Cash received from the exercise of stock options in 2015, 2014 and 2013 was $146 million, $283 million and $580 million, respectively. The tax benefit realized from income tax deductions from stock option exercises, which was recorded in additional paid-in capital, in 2015, 2014 and 2013 was $18 million, $54 million and $84 million, respectively.

The fair value of each option is estimated on the date of grant using a Black-Scholes-Merton option-pricing model. The following weighted-average assumptions were used for options granted in 2015, 2014 and 2013, the majority of which were options granted in the beginning of each year:

• The expected volatility is based on both weighted historical and implied volatilities of the Company’s common stock price.
• In 2015, 2014 and 2013, the expected life of stock options was determined using both historical data and expectations of option exercise behavior.

Restricted Stock Awards

RSAs are valued based on the stock price on the date of grant, contain either a) service conditions or b) both service and performance conditions, and generally vest 25 percent per year beginning with the first anniversary of the grant date. RSAs containing both service and performance conditions generally vest on the third anniversary of the grant date, and the number of shares earned depends on the achievement of predetermined Company metrics. All RSA holders receive non-forfeitable dividends or dividend equivalents. The total fair value of shares vested during 2015, 2014 and 2013 was $247 million, $298 million and $336 million, respectively (based upon the Company’s stock price at the vesting date).

The weighted-average grant date fair value of RSAs granted in 2015, 2014 and 2013, is $81.99, $86.65 and $60.13, respectively.

Liability-based Awards

Certain employees are awarded PGs and other incentive awards that can be settled with cash or equity shares at the Company’s discretion and final Compensation and Benefits Committee payout approval. These awards earn value based on performance, market and service conditions, and vest over periods of one to three years.

PGs and other incentive awards are generally settled with cash and thus are classified as liabilities; therefore, the fair value is determined at the date of grant and remeasured quarterly as part of compensation expense over the vesting period. Cash paid upon vesting of these awards in 2015, 2014 and 2013 was $74 million, $62 million and $43 million, respectively.

Summary of Stock Plan Expense

The components of the Company’s total stock-based compensation expense (net of forfeitures) for the years ended December 31, are as follows:

• As of December 31, 2015, the total unrecognized compensation cost related to unvested RSAs and options of $214 million and $3 million, respectively, will be recognized ratably over the weighted-average remaining vesting period of 2.1 years and 1.2 years, respectively.
• The total income tax benefit recognized in the Consolidated Statements of Income for stock-based compensation arrangements for the years ended December 31, 2015, 2014 and 2013 was $83 million, $104 million and $127 million, respectively.