NOTE 10: Accounting for Share-Based Payment
Overview of Share-Based Payment Plans
The Company has a number of active and inactive equity incentive plans (the Incentive Plans) under which the Company has been authorized to grant share-based awards to key employees and non-employee directors. The Company also has an employee stock purchase plan (the ESPP) that allows employees to purchase Company shares at a discount through payroll deductions. All of these plans contain a nondiscretionary anti-dilution provision that is designed to equalize the value of an award as a result of any stock dividend, stock split, recapitalization, or any other similar equity restructuring.
A total of 169.0 million shares have been previously authorized for grant to key employees and non-employee directors under all of the Company's Incentive Plans, but only 50.0 million of those shares were authorized for grants of share-based awards under the Company's currently active Incentive Plans. In addition, a total of 70.0 million shares have been previously authorized for purchases by employees participating in the ESPP.
At January 31, 2014, there were 9.1 million shares remaining available for grants under the currently active Incentive Plans and 27.2 million shares remaining available for purchases under the ESPP.
The Company recognized share-based payment expense in SG&A expense in the consolidated statements of earnings totaling $100 million in both 2013 and 2012, and $107 million in 2011. The total associated income tax benefit recognized was $32 million, $33 million and $32 million in 2013, 2012 and 2011, respectively.
Total unrecognized share-based payment expense for all share-based payment plans was $143 million at January 31, 2014, of which $79 million will be recognized in 2014, $51 million in 2015 and $13 million thereafter. This results in these amounts being recognized over a weighted-average period of 1.9 years.
For all share-based payment awards, the expense recognized has been adjusted for estimated forfeitures where the requisite service is not expected to be provided. Estimated forfeiture rates are developed based on the Company’s analysis of historical forfeiture data for homogeneous employee groups.
General terms and methods of valuation for the Company’s share-based awards are as follows:
Stock Options
Stock options have terms of seven or 10 years, with one-third of each grant vesting each year for three years, and are assigned an exercise price equal to the closing market price of a share of the Company’s common stock on the date of grant. Options are expensed on a straight-line basis over the grant vesting period, which is considered to be the requisite service period.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. When determining expected volatility, the Company considers the historical performance of the Company’s stock, as well as implied volatility. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant, based on the options’ expected term. The expected term of the options is based on the Company’s evaluation of option holders’ exercise patterns and represents the period of time that options are expected to remain unexercised. The Company uses historical data to estimate the timing and amount of forfeitures. The weighted average assumptions used in the Black-Scholes option-pricing model and weighted-average grant date fair value for options granted in 2013, 2012 and 2011 are as follows:
|
| | | | | | | | | | | |
| 2013 |
| | 2012 |
| | 2011 |
|
Weighted-average assumptions used: | | | | | |
Expected volatility | 34.2 | % | | 38.6 | % | | 39.9 | % |
Dividend yield | 1.45 | % | | 1.76 | % | | 1.39 | % |
Risk-free interest rate | 1.31 | % | | 0.75 | % | | 1.83 | % |
Expected term, in years | 7.39 |
| | 4.41 |
| | 4.44 |
|
| | | | | |
Weighted-average grant date fair value | $ | 12.24 |
| | $ | 7.84 |
| | $ | 7.93 |
|
The total intrinsic value of options exercised, representing the difference between the exercise price and the market price on the date of exercise, was approximately $48 million, $84 million and $8 million in 2013, 2012 and 2011, respectively.
Transactions related to stock options for the year ended January 31, 2014 are summarized as follows:
|
| | | | | | | | | | | | |
| Shares
(In thousands) |
| | Weighted-Average
Exercise Price
Per Share |
| | Weighted-Average
Remaining Term
(In years) | | Aggregate
Intrinsic Value
(In thousands) |
|
Outstanding at February 1, 2013 | 8,718 |
| | $ | 26.58 |
| | | | |
Granted | 2,112 |
| | 38.39 |
| | | | |
Canceled, forfeited or expired | (260 | ) | | 32.09 |
| | | | |
Exercised | (3,214 | ) | | 27.40 |
| | | | |
Outstanding at January 31, 2014 | 7,356 |
| | $ | 29.42 |
| | 5.43 | | $ | 124,128 |
|
Vested and expected to vest at | | | | | | | |
January 31, 20141 | 7,271 |
| | $ | 29.35 |
| | 5.40 | | $ | 123,178 |
|
Exercisable at January 31, 2014 | 3,071 |
| | $ | 24.88 |
| | 3.48 | | $ | 65,749 |
|
1 Includes outstanding vested options as well as outstanding nonvested options after a forfeiture rate is applied.
Restricted Stock Awards
Restricted stock awards are valued at the market price of a share of the Company’s common stock on the date of grant. In general, these awards vest at the end of a three year period from the date of grant and are expensed on a straight-line basis over that period, which is considered to be the requisite service period. The Company uses historical data to estimate the timing and amount of forfeitures. The weighted-average grant-date fair value per share of restricted stock awards granted was $41.78, $28.25 and $25.29 in 2013, 2012, and 2011, respectively. The total fair value of restricted stock awards vested was approximately $98 million, $118 million and $61 million in 2013, 2012 and 2011, respectively.
Transactions related to restricted stock awards for the year ended January 31, 2014 are summarized as follows:
|
| | | | | | |
| Shares
(In thousands) |
| | Weighted-Average Grant-Date Fair Value Per Share |
|
Nonvested at February 1, 2013 | 7,134 |
| | $ | 25.72 |
|
Granted | 2,928 |
| | 41.78 |
|
Vested | (2,535 | ) | | 23.95 |
|
Canceled or forfeited | (479 | ) | | 29.91 |
|
Nonvested at January 31, 2014 | 7,048 |
| | $ | 32.74 |
|
Deferred Stock Units
Deferred stock units are valued at the market price of a share of the Company’s common stock on the date of grant. For non-employee Directors, these awards vest immediately and are expensed on the grant date. During 2013, 2012 and 2011, each non-employee Director was awarded a number of deferred stock units determined by dividing the annual award amount by the fair market value of a share of the Company’s common stock on the award date and rounding up to the next 100 units. The annual award amount used to determine the number of deferred stock units granted to each Director was $150,000 for 2013 and $140,000 for both 2012 and 2011. During 2013, 36,000 deferred stock units were granted and immediately vested for non-employee Directors. The weighted-average grant-date fair value per share of deferred stock units granted was $42.11, $26.36 and $24.25 in 2013, 2012 and 2011, respectively. The total fair value of deferred stock units vested was $1.5 million in 2013 and $1 million in 2012 and 2011. During 2013, no deferred stock units were released as a result of termination of service. At January 31, 2014, there were 0.6 million deferred stock units outstanding, all of which were vested.
Performance Share Units
The Company has issued two types of Performance Share Units - those based on the achievement of targeted Company return on non-cash average assets (RONCAA) and those based on targeted Company improvement in brand differentiation. Performance share units do not have dividend rights. In general, upon the achievement of a minimum threshold, 50% to 150% of these awards vest at the end of a three year service period from the date of grant based upon achievement of the performance goal specified in the performance share unit agreement.
Performance share units are expensed on a straight-line basis over the requisite service period, based on the probability of achieving the performance goal, with changes in expectations recognized as an adjustment to earnings in the period of the change. If the performance goal is not met, no compensation cost is recognized and any previously recognized compensation cost is reversed. The Company uses historical data to estimate the timing and amount of forfeitures.
RONCAA Awards
Performance share units issued based on the achievement of targeted RONCAA, which is considered a performance condition, are classified as equity awards and are valued at the market price of a share of the Company’s common stock on the date of grant less the present value of dividends expected during the requisite service period. The weighted-average grant-date fair value per unit of performance share units classified as equity awards granted was $36.48, $26.60 and $25.13 in 2013, 2012 and 2011, respectively. No performance share units vested in 2013, 2012 or 2011.
Transactions related to performance share units classified as equity awards for the year ended January 31, 2014 are summarized as follows:
|
| | | | | | |
| Units
(In thousands)1 |
| | Weighted-Average Grant-Date Fair Value Per Unit |
|
Nonvested at February 1, 2013 | 730 |
| | $ | 25.42 |
|
Granted | 327 |
| | 36.48 |
|
Canceled or forfeited | (56 | ) | | 28.82 |
|
Nonvested at January 31, 2014 | 1,001 |
| | $ | 28.85 |
|
Brand Differentiation Awards
Performance share units issued based on targeted Company improvement in brand differentiation, which is not considered a market, performance, or service related condition, are classified as liability awards and are measured at fair value at each reporting date. The awards are valued at the market price of a share of the Company’s common stock at the end of each reporting period less the present value of dividends expected to be issued during the remaining requisite service period. The weighted-average grant-date fair value per unit of performance share units classified as liability awards granted was $36.48, $26.60 and $25.45 in 2013, 2012 and 2011, respectively. No performance share units vested in 2013, 2012 or 2011. The total liability for performance share units classified as liability awards at January 31, 2014 was $2 million.
Transactions related to performance share units classified as liability awards for the year ended January 31, 2014 are summarized as follows:
|
| | | | | | |
| Units
(In thousands)1 |
| | Weighted-Average Grant-Date Fair Value Per Unit |
|
Nonvested at February 1, 2013 | 359 |
| | $ | 25.42 |
|
Granted | 159 |
| | 36.48 |
|
Canceled or forfeited | (25 | ) | | 28.05 |
|
Nonvested at January 31, 2014 | 493 |
| | $ | 28.85 |
|
¹ The number of units presented is based on achieving the targeted performance goals as defined in the performance share unit
agreements. As of January 31, 2014, the maximum number of units that could vest under the provisions of the agreements
were 1.5 million for the RONCAA awards and 0.7 million units for the brand differentiation awards.
Restricted Stock Units
Restricted stock units do not have dividend rights and are valued at the market price of a share of the Company’s common stock on the date of grant less the present value of dividends expected during the requisite service period. In general, these awards vest at the end of a three year period from the date of grant and are expensed on a straight-line basis over that period, which is considered to be the requisite service period. The Company uses historical data to estimate the timing and amount of forfeitures. The weighted-average grant-date fair value per share of restricted stock units granted was $41.53, $27.84 and $23.97 in 2013, 2012 and 2011, respectively. The total fair value of restricted stock units vesting was approximately $3.4 million in 2013. An insignificant amount of restricted stock units vested in 2012 and 2011.
Transactions related to restricted stock units for the year ended January 31, 2014 are summarized as follows:
|
| | | | | | |
| Shares
(In thousands) |
| | Weighted-Average Grant-Date Fair Value Per Share |
|
Nonvested at February 1, 2013 | 206 |
| | $ | 25.40 |
|
Granted | 160 |
| | 41.53 |
|
Vested | (84 | ) | | 24.32 |
|
Canceled or forfeited | (54 | ) | | 30.15 |
|
Nonvested at January 31, 2014 | 228 |
| | $ | 35.99 |
|
ESPP
The purchase price of the shares under the ESPP equals 85% of the closing price on the date of purchase. The Company’s share-based payment expense per share is equal to 15% of the closing price on the date of purchase. The ESPP is considered a liability award and is measured at fair value at each reporting date, and the share-based payment expense is recognized over the six-month offering period. During 2013, the Company issued 2.0 million shares of common stock and recognized $13 million of share-based payment expense pursuant to the plan.
