Annual report pursuant to Section 13 and 15(d)

Employee Equity Incentive Plans

v3.6.0.2
Employee Equity Incentive Plans
 12 Months Ended
Dec. 31, 2016
Employee Benefits and Share-based Compensation [Abstract]  
Employee Equity Incentive Plans [Text Block]
Note 19: Employee Equity Incentive Plans
Our equity incentive plans are broad-based, long-term programs intended to attract and retain talented employees and align stockholder and employee interests.
Under the 2006 Equity Incentive Plan (the 2006 Plan), 753 million shares of common stock are authorized for issuance as equity awards to employees and non-employee directors through June 2018. As of December 31, 2016, 216.5 million shares of common stock remained available for issuance under the 2006 Plan.
In connection with our completed acquisition of Altera in the first quarter of 2016, we assumed two equity incentive plans with outstanding unvested stock options and RSUs. The assumed stock options and RSUs generally retained the terms and conditions under which they were originally granted. We will not grant additional shares under these assumed plans.
We grant RSUs with both a market condition and a service condition (market-based RSUs), referred to in our Proxy Statement as outperformance stock units (OSUs), to a group of senior officers, employees, and non-employee directors. For OSUs granted in 2016, the number of shares of our common stock to be received at vesting will range from 0% to 200% of the target amount, based on total stockholder return (TSR) on our common stock measured against the benchmark TSR of a peer group over a three-year period. TSR is a measure of stock price appreciation plus any dividends paid in this performance period. As of December 31, 2016, 6.7 million OSUs were outstanding. These OSUs accrue dividend equivalents and generally vest three years and one month from the grant date. RSU and option awards generally vest over four years from the grant date. Stock options generally expire seven years from the date of grant.
The 2006 Stock Purchase Plan allows eligible employees to purchase shares of our common stock at 85% of the value of our common stock on specific dates. Under the 2006 Stock Purchase Plan, 373 million shares of common stock are authorized for issuance through August 2021. As of December 31, 2016, 164.8 million shares of common stock remained available for issuance under the 2006 Stock Purchase Plan.
Share-Based Compensation
Share-based compensation recognized in 2016 was $1.4 billion ($1.3 billion in 2015 and $1.1 billion in 2014).
The total share-based compensation cost capitalized as part of inventory as of December 31, 2016 was $44 million ($49 million as of December 26, 2015 and $39 million as of December 27, 2014). During 2016, the tax benefit that we realized for the tax deduction from share-based awards totaled $616 million ($533 million in 2015 and $555 million in 2014).
We estimate the fair value of RSUs with time-based vesting using the value of our common stock on the date of grant, reduced by the present value of dividends expected to be paid on our shares of common stock prior to vesting. We estimate the fair value of OSUs using a Monte Carlo simulation model on the date of grant.
We use the Black-Scholes option pricing model to estimate the fair value of rights to acquire shares of common stock granted under the 2006 Stock Purchase Plan on the date of the grant. We based the weighted average estimated value of RSU and OSU grants and rights granted under the 2006 Stock Purchase Plan on the weighted average assumptions for each period as follows:
 
 
RSUs and OSUs
 
Stock Purchase Plan
 
 
Dec 31,
2016
 
Dec 26,
2015
 
Dec 27,
2014
 
Dec 31,
2016
 
Dec 26,
2015
 
Dec 27,
2014
Estimated values
 
$
29.76

 
$
31.63

 
$
25.40

 
$
6.70

 
$
6.56

 
$
5.87

Risk-free interest rate
 
0.9
%
 
0.6
%
 
0.5
%
 
0.5
%
 
0.1
%
 
0.1
%
Dividend yield
 
3.3
%
 
2.9
%
 
3.3
%
 
3.2
%
 
3.1
%
 
3.2
%
Volatility
 
23
%
 
27
%
 
23
%
 
22
%
 
25
%
 
22
%
Expected life (in years)
 
n/a

 
n/a

 
n/a

 
0.5

 
0.5

 
0.5


We base the expected volatility for rights granted under the 2006 Stock Purchase Plan on implied volatility. We base expected volatility for OSUs on historical volatility. 
Restricted Stock Unit Awards
RSU activity in 2016 was as follows:
 
 
Number of
RSUs
(In Millions)
 
Weighted
Average
Grant-Date
Fair Value
December 26, 2015
 
107.4

 
$
26.93

Granted
 
53.1

 
$
29.76

Assumed in acquisition
 
7.3

 
$
33.79

Vested
 
(50.0
)
 
$
26.29

Forfeited
 
(11.0
)
 
$
28.10

December 31, 2016
 
106.8

 
$
28.99

Expected to vest as of December 31, 2016
99.9

 
$
28.99


The aggregate fair value of awards that vested in 2016 was $1.6 billion ($1.5 billion in 2015 and $1.1 billion in 2014), which represents the market value of our common stock on the date that the RSUs vested. The grant-date fair value of awards that vested in 2016 was $1.3 billion ($1.1 billion in 2015 and $949 million in 2014). The number of RSUs vested includes shares of common stock that we withheld on behalf of employees to satisfy the minimum statutory tax withholding requirements. RSUs that are expected to vest are net of estimated future forfeitures.
As of December 31, 2016, unrecognized compensation costs related to RSUs granted under our equity incentive plans were $1.9 billion. We expect to recognize those costs over a weighted average period of 1.2 years.
Stock Option Awards
As of December 31, 2016, options outstanding that have vested and are expected to vest were as follows:
 
 
Number of
Options
(In Millions)
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Term
(In Years)
 
Aggregate
Intrinsic
Value
(In Millions)
Vested
 
16.6

 
$
23.81

 
2.1
 
$
207

Expected to vest
 
2.9

 
$
23.33

 
3.3
 
$
38

Total
 
19.5

 
$
23.74

 
2.3
 
$
245


Aggregate intrinsic value represents the difference between the exercise price and $36.27, the closing price of our common stock on December 30, 2016, as reported on the NASDAQ Global Select Market, for all in-the-money options outstanding. Options outstanding that are expected to vest are net of estimated future option forfeitures.
The aggregate intrinsic value of stock option exercises in 2016 was $453 million ($284 million in 2015 and $611 million in 2014), which represents the difference between the exercise price and the value of our common stock at the time of exercise. During 2016, 34.1 million options were exercised with a weighted average exercise price of $20.43. Stock option grants were insignificant in all years during the three-year period ended December 31, 2016. As of December 31, 2016, 19.6 million options were outstanding with a weighted average exercise price of $23.73 (54.2 million outstanding with a weighted average exercise price of $21.65 as of December 26, 2015). The weighted average remaining contractual life of outstanding options is 2.2 years. These options will expire if they are not exercised by specific dates through May 2023.
Stock Purchase Plan
Employees purchased 16.5 million shares of common stock in 2016 for $415 million under the 2006 Stock Purchase Plan (15.8 million shares of common stock for $421 million in 2015 and 19.4 million shares of common stock for $393 million in 2014). As of December 31, 2016, unrecognized share-based compensation costs related to rights to acquire shares of common stock under our 2006 Stock Purchase Plan totaled $13 million. We expect to recognize those costs over a period of approximately two months.