NOTE U. STOCK-BASED COMPENSATION

The following table presents total stock-based compensation cost included in income from continuing operations.

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The company’s total unrecognized compensation cost related to non-vested awards at December 31, 2022 was $1.5 billion and is expected to be recognized over a weighted-average period of approximately 2.6 years.

Capitalized stock-based compensation cost was not material at December 31, 2022, 2021 and 2020.

Incentive Awards

Stock-based incentive awards are provided to employees under the terms of the company’s long-term performance plans (the Plans). The Plans are administered by the Executive Compensation and Management Resources Committee of the Board of Directors. Awards available under the Plans principally include restricted stock units, performance share units, stock options or any combination thereof.

There were 293 million shares originally authorized to be awarded under the company's existing Plans and 66 million shares granted under previous plans that, if and when those awards were cancelled, could be reissued under the existing Plans. At December 31, 2022, 65 million unused shares were available to be granted.

Stock Awards

Stock awards for the periods presented were made in the form of Restricted Stock Units (RSUs), including Retention Restricted Stock Units (RRSUs), or Performance Share Units (PSUs).

The following table summarizes RSU and PSU activity under the Plans during the years ended December 31, 2022, 2021 and 2020.

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The total fair value of RSUs and PSUs granted and vested during the years ended December 31, 2022, 2021 and 2020 were as follows:

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In connection with vesting and release of RSUs and PSUs, the tax benefits realized by the company for the years ended December 31, 2022, 2021 and 2020 were $249 million, $175 million and $139 million, respectively.

Stock Options

Stock options are awards which allow the employee to purchase shares of the company’s stock at a fixed price. Stock options are granted at an exercise price equal to the company’s average high and low stock price on the date of grant. These awards generally vest in four equal increments on the first four anniversaries of the grant date and have a contractual term of 10 years. The company estimates the fair value of stock options at the date of grant using a Black-Scholes valuation model. Key inputs and assumptions used to estimate the fair value of stock options include the grant price of the award, the expected option term, volatility of the company’s stock, the risk-free rate and the company’s dividend yield. For the stock options granted for the year ended December 31, 2022, the expected option term was determined from historical exercise patterns, volatility was based on an analysis of the company’s historical stock prices over the expected option term, the risk-free rate was obtained from the U.S. Treasury yield curve in effect at the time of grant and the dividend yield was based on the company’s expectation of paying dividends in the foreseeable future. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by employees who receive equity awards, and subsequent events are not indicative of the reasonableness of the original estimates of fair value made by the company. During the years ended December 31, 2021 and 2020, the company did not grant stock options and no material stock options were exercised, forfeited or cancelled. In 2022, stock options were primarily granted by the company as part of its executive compensation programs.  

The weighted-average fair value of stock options granted for the year ended December 31, 2022 was $14.29. The fair value was estimated based on the following weighted-average assumptions:

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The following table summarizes option activity under the Plans during the year ended December 31, 2022.

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The weighted-average remaining contractual term and the aggregate intrinsic value of stock options outstanding was 7.7 years and $87 million, respectively, at December 31, 2022. The weighted-average remaining contractual term and the aggregate intrinsic value of stock options vested and exercisable was 3.1 years and $12 million, respectively, at December 31, 2022. The total intrinsic value of stock options exercised for the years ended December 31, 2022, 2021 and 2020 was immaterial.

The company settles employee stock option exercises primarily with newly issued common shares and, occasionally, with treasury shares. Total treasury shares held at December 31, 2022 and 2021 were approximately 1,351 million shares.

Acquisitions

In connection with various acquisition transactions, there were 0.4 million stock options outstanding at December 31, 2022, as a result of the company’s conversion of stock-based awards previously granted by acquired entities. The weighted-average exercise price of these stock options was $20 per share. No material stock awards were outstanding at December 31, 2022.

IBM Employees Stock Purchase Plan

Effective April 1, 2022, the company increased the discount for eligible participants to purchase shares of IBM common stock under its Employee Stock Purchase Plan (ESPP) from 5 percent to 15 percent off the average market price on the date of purchase. With this change, the ESPP is considered compensatory under the accounting requirements for stock-based compensation. The ESPP enables eligible participants to purchase shares of IBM common stock through payroll deductions of up to 10 percent of eligible compensation. Eligible compensation includes any compensation received by the employee during the year. The ESPP provides for semi-annual offering periods during which shares may be purchased and continues as long as shares remain available under the ESPP, unless terminated earlier at the discretion of the Board of Directors. Individual ESPP participants are restricted from purchasing more than $25,000 of common stock in one calendar year or 1,000 shares in an offering period.

Employees purchased approximately 2.4 million, 1.0 million and 1.1 million shares under the ESPP during the years ended December 31, 2022, 2021 and 2020, respectively. For the year ended December 31, 2022, the average market price of shares purchased was $114 per share and the total stock-based compensation cost was $43 million. Cash dividends declared and paid by the company on its common stock also include cash dividends on the company stock purchased through the ESPP. Dividends are paid on full and fractional shares and can be reinvested. The company stock purchased through the ESPP is considered outstanding and is included in the weighted-average outstanding shares for purposes of computing basic and diluted earnings per share.

Approximately 14.4 million shares were available for purchase under the ESPP at December 31, 2022.