United Parcel Service, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

STOCK-BASED COMPENSATION

STOCK-BASED COMPENSATION

12 Months Ended

Dec. 31, 2020

Share-based Payment Arrangement, Noncash Expense [Abstract]

Share-based Payment Arrangement [Text Block]

STOCK - BASED COMPENSATION

The UPS Incentive Compensation Plan permits the grant of non-qualified and incentive stock options, stock appreciation rights, restricted stock and stock units, and restricted performance shares and units to eligible employees. On May 14, 2018, our shareholders approved our 2018 Omnibus Incentive Compensation Plan under which we are authorized to issue an additional 26 million shares. Each share issued in the form of restricted stock units and restricted performance units (collectively referred to as "Restricted Units"), stock options and other permitted awards reduces the share reserve by one share. We had 7 million shares available to be issued under the UPS Incentive Compensation Plan as of December 31, 2020.

The primary compensation programs offered under the UPS Incentive Compensation Plan include the UPS Management Incentive Award program, the UPS Long-Term Incentive Performance Award program and the UPS Stock Option program. These awards are discussed in the following paragraphs. We also match a portion of participating employees’ contributions to the UPS 401(k) Savings Plan in shares of UPS class A common stock. The total expense recognized in our statements of consolidated income under all stock compensation programs was $796, $915 and $634 million during 2020, 2019 and 2018, respectively. The associated income tax benefit recognized in our statements of consolidated income was $210, $216 and $186 million during 2020, 2019 and 2018, respectively. The cash income tax benefit received from the exercise of stock options and conversion of Restricted Units to class A shares was $272, $148 and $175 million during 2020, 2019 and 2018, respectively.

Management Incentive Award Program ("MIP")

Non-executive management earning the right to receive MIP awards is determined annually by the Salary Committee, which is comprised of executive officers of UPS. Awards granted to executive officers are determined annually by the Compensation Committee of the UPS Board of Directors. Our MIP provides, with certain exceptions, that one-half to two-thirds of the annual award will be made in Restricted Units, depending upon the level of management involved. The remaining one-third to one-half of the award is electable in the form of cash or unrestricted shares of class A common stock, and is fully vested at the time of grant. Upon conversion, Restricted Units result in the issuance of an equivalent number of UPS class A common shares after required tax withholdings.

Except in the case of death, Restricted Units granted under the MIP prior to 2019 previously vested over a five-year period with approximately 20% of the award vesting and converting to class A shares at the anniversary of each grant date. The grant value, less estimated forfeitures, was expensed on a straight-line basis over the requisite service period except in the case of death, disability or retirement, in which case immediate expensing occurred. On November 3, 2020, the Compensation Committee of the UPS Board of Directors approved an acceleration of the five-year vesting period for all outstanding Restricted Units granted to non-executive management under the MIP prior to 2019. These Restricted Units became fully vested as of December 31, 2020, however, conversion to class A shares will continue to occur over a five-year period. The elimination of the future service requirement for these awards resulted in the recognition of an additional $133 million of stock compensation expense for the year, of which approximately $104 million was recorded in U.S. Domestic Package.

Beginning with the MIP grant in the first quarter of 2019, Restricted Units vest one year following the grant date, except in the case of death, disability or retirement, in which case immediate vesting occurs. The grant value is expensed on a straight-line basis, less estimated forfeitures, over the requisite service period except in the case of death, disability or retirement, in which case immediate expensing occurs.

All Restricted Units granted are subject to early cancellation or vesting under certain conditions. Dividends earned on Restricted Units are reinvested in additional Restricted Units at each dividend payable date until they have fully vested. As of December 31, 2020, we had the following outstanding Restricted Units, including reinvested dividends, granted under the MIP:


	Restricted Units (in thousands)	Weighted-Average Grant Date Fair Value		Weighted-Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in millions)
Non-vested as of January 1, 2020	10,739	$	106.94
Vested	(12,195)	106.60
Granted	3,638	102.54
Reinvested Dividends	276	N/A
Forfeited / Expired	(165)	101.80
Non-vested as of December 31, 2020	2,293	$	102.91	0.26	$	386

The fair value of each Restricted Unit is the NYSE closing price of class B common stock on the date of grant. The weighted-average grant date fair value of Restricted Units granted during 2020, 2019 and 2018 was $102.54, $108.78 and $110.95, respectively. The total fair value of Restricted Units vested was $827, $457 and $596 million in 2020, 2019 and 2018, respectively. As of December 31, 2020, there was $37 million of total unrecognized compensation cost related to non-vested Restricted Units. That cost is expected to be recognized over a weighted-average period of eight months.

Long-Term Incentive Performance Award Program ("LTIP")

We award Restricted Units under the LTIP to certain eligible management employees. These Restricted Units generally vest at the end of a three-year performance period except in the case of death, disability or retirement, in which case immediate vesting occurs on a prorated basis. The number of Restricted Units earned is based on the achievement of the performance targets established on the grant date.

For awards granted prior to 2020, the performance targets are equally weighted among consolidated operating return on

invested capital ("ROIC"), growth in currency-constant consolidated revenue and total shareholder return ("RTSR") relative to a

peer group of companies. For the two-thirds of the award related to ROIC and growth in currency-constant consolidated revenue, we recognize the grant date fair value of these Restricted Units, less estimated forfeitures, as compensation expense ratably over the vesting period, based on the number of awards expected to be earned. The remaining one-third of the award related to RTSR is valued using a Monte Carlo model. We recognize the grant date fair value of this portion of the award, less estimated forfeitures, as compensation expense ratably over the vesting period.

Beginning with the LTIP grant in 2020, the performance targets are equally weighted between adjusted earnings per share and adjusted cumulative free cash flow. The final number of Restricted Units earned will then be subject to adjustment based on RTSR relative to the companies within the Standard & Poor's 500 Index. We determine the grant date fair value of the Restricted Units using a Monte Carlo model and recognize compensation expense, less estimated forfeitures, ratably over the vesting period based on the number of awards expected to be earned.

For the 2020 award, the LTIP will be subdivided into two measurement periods. The first measurement period will evaluate the achievement of performance targets for the year 2020. The second measurement period will evaluate the achievement of performance targets for the years 2021 through 2022. The performance targets for the second measurement period will be determined at a future date.

The weighted-average assumptions used in our Monte Carlo models for each award year were as follows:


	2020			2019			2018
Risk-free interest rate	0.15		%	2.23		%	2.61		%
Expected volatility	27.53		%	19.64		%	16.51		%
Weighted-average fair value of units granted	$	92.77		$	123.44		$	137.57
Share payout	101.00		%	115.04		%	123.47		%

There is no expected dividend yield as units earn dividend equivalents.

As of December 31, 2020, we had the following Restricted Units outstanding, including reinvested dividends, that were granted under our LTIP program:


	Restricted Units (in thousands)	Weighted-Average Grant Date Fair Value		Weighted-Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in millions)
Non-vested as of January 1, 2020	1,691	$	109.18
Vested	(867)	110.79
Granted	230	92.76
Reinvested Dividends	64	N/A
Forfeited / Expired	(114)	107.34
Non-vested as of December 31, 2020	1,004	$	104.15	1.22	$	169

The fair value of each Restricted Unit is the NYSE closing price of class B common stock on the date of grant. The weighted-average grant date fair value of Restricted Units granted during 2020, 2019 and 2018 was $92.76, $107.30 and $111.42, respectively. The total fair value of Restricted Units vested was $112, $71 and $97 million in 2020, 2019 and 2018, respectively. As of December 31, 2020, there was $31 million of total unrecognized compensation cost related to non-vested Restricted Units. That cost is expected to be recognized over a weighted-average period of one year.

Non-qualified Stock Options

We maintain stock option plans under which options are granted to purchase shares of UPS class A common stock. Stock options granted in connection with the UPS Incentive Compensation Plan must have an exercise price at least equal to the NYSE closing price of UPS class B common stock on the date the option is granted.

We grant non-qualified stock options to a limited group of eligible senior management employees annually, in which the value granted is determined as a percentage of salary. Options granted generally vest over a five-year period with approximately 20% of the award vesting at each anniversary of the grant date except in the case of death, disability or retirement, in which case immediate vesting occurs. The options granted expire 10 years after the date of the grant. Option holders may exercise their options via the payment of cash or class A common stock and new class A shares are issued upon exercise.

The following is an analysis of options to purchase shares of class A common stock issued and outstanding:


	Options (in thousands)	Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in millions)
Outstanding at January 1, 2020	1,498	$	100.74
Exercised	(375)	92.76
Granted	441	104.10
Forfeited / Expired	—	—
Outstanding at December 31, 2020	1,564	$	103.60	6.84	$	101
Options Vested and Expected to Vest	1,564	$	103.60	6.84	$	101
Exercisable at December 31, 2020	801	$	101.33	5.46	$	54

The fair value of each option grant is estimated using the Black-Scholes option pricing model. The weighted-average assumptions used by year, and the calculated weighted-average fair values of options, are as follows:


	2020			2019			2018
Expected dividend yield	3.51		%	2.94		%	2.93		%
Risk-free interest rate	1.26		%	2.60		%	2.84		%
Expected life in years	7.5			7.5			7.5
Expected volatility	19.25		%	17.79		%	16.72		%
Weighted-average fair value of options granted	$	11.74		$	16.34		$	15.23

The expected dividend yield is based on the recent historical dividend yields for our stock, taking into account changes in dividend policy. The risk-free interest rate is based on the term structure of interest rates at the time of the option grant. The expected life represents an estimate of the period of time options are expected to remain outstanding, and we have relied upon a combination of the observed exercise behavior of our prior grants with similar characteristics, the vesting schedule of the grants and an index of peer companies with similar grant characteristics in estimating this variable. Expected volatilities are based on the historical returns on our stock and the implied volatility of our publicly-traded options.

We received cash of $28, $7 and $12 million during 2020, 2019 and 2018, respectively, from option holders resulting from the exercise of stock options. The total intrinsic value of options exercised during 2020, 2019 and 2018 was $17, $5 and $6 million, respectively. As of December 31, 2020, there was $3 million of total unrecognized compensation cost related to non-vested options. That cost is expected to be recognized over a weighted-average period of three years and five months.

The following table summarizes information about stock options outstanding and exercisable as of December 31, 2020:


	Options Outstanding				Options Exercisable
Exercise Price Range	Options (in thousands)	Weighted-Average Remaining Contractual Term (in years)	Weighted-Average Exercise Price		Options (in thousands)	Weighted-Average Exercise Price
$65.01 - $80.00	67	0.90	$	76.02	67	$	76.02
$80.01 - $95.00	46	2.17	82.87		46	82.87
$95.01 - $110.00	1,208	7.09	104.28		587	103.87
$110.01 - $125.00	243	8.12	111.80		101	111.80
	1,564	6.84	$	103.60	801	$	101.33

Discounted Employee Stock Purchase Plan

We maintain an employee stock purchase plan for all eligible employees. Under this plan, shares of UPS class A common stock may be purchased at quarterly intervals at 95% of the NYSE closing price of UPS class B common stock on the last day of each quarterly period. Employees purchased 0.9, 1.0 and 0.9 million shares at average prices of $110.92, $102.11 and $105.53 per share, during 2020, 2019 and 2018, respectively. This plan is not considered to be compensatory, and therefore no compensation cost is measured for the employees’ purchase rights.