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, 2017

Disclosure of Compensation Related Costs, Share-based Payments [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. The number of shares reserved for issuance under the Incentive Compensation Plan is 27 million. Each share issued pursuant to restricted stock units and restricted performance units (collectively referred to as "Restricted Units"), stock options and other permitted awards will reduce the share reserve by one share. We had 12 million shares available to be issued under the Incentive Compensation Plan as of December 31, 2017.

The primary compensation programs offered under the UPS Incentive Compensation Plan include the UPS Management Incentive Award program, the Coyote Restricted Stock Award, the UPS Long-Term Incentive Performance Award program and the UPS Stock Option program. These awards are discussed in the following paragraphs. The total expense recognized in our income statement under all stock compensation award programs was $584, $591 and $574 million during 2017, 2016 and 2015, respectively. The associated income tax benefit recognized in our income statement was $227, $219 and $215 million during 2017, 2016 and 2015, respectively. The cash income tax benefit received from the exercise of stock options and the lapsing of Restricted Units was $276, $207 and $252 million during 2017, 2016 and 2015, respectively.

Management Incentive Award Program ("MIP")

Non-executive management earning the right to receive the Management Incentive Award are 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 Management Incentive Award program provides, with certain exceptions, that one-half to two-thirds of the annual Management Incentive Award will be made in Restricted Units (depending upon the level of management involved). The other 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 vesting, Restricted Units result in the issuance of the equivalent number of UPS class A common shares after required tax withholdings. Except in the case of death, Restricted Units granted for our Management Incentive Award vest over a five-year period with approximately 20% of the award vesting at each anniversary date of the grant. The entire grant (less estimated forfeitures) is 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 occurs). All Restricted Units granted are subject to earlier cancellation or vesting under certain conditions. Dividends earned on Restricted Units are reinvested in additional Restricted Units at each dividend payable date.

Coyote Restricted Stock Award

In August 2015 we acquired Coyote, a U.S.-based truckload freight brokerage company. During the third quarter of 2015, we granted Restricted Units to certain eligible Coyote management employees. The vesting of Restricted Units granted under this award will vary between one and four years with an equal number of restricted units vesting at each anniversary date (except in the case of death, in which case immediate vesting occurs). The entire grant is 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 occurs).

Long-Term Incentive Performance Award granted prior to 2014

We award Restricted Units in conjunction with our Long-Term Incentive Performance Award program to certain eligible employees. The Restricted Units ultimately granted under the Long-Term Incentive Performance Award program were based upon the achievement of certain performance measures, including growth in consolidated revenue and operating return on invested capital during the performance award cycle, and other measures, including the achievement of an adjusted earnings per share target over the entire three-year performance award cycle. The last award granted under this program fully vested in the first quarter of 2016.

As of December 31, 2017, we had the following Restricted Units outstanding, including reinvested dividends, that were granted under our Management Incentive Award program and the Coyote Restricted Stock Award:



	Shares (in thousands)		Weighted-Average Grant Date Fair Value		Weighted-Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in millions)
Nonvested at January 1, 2017	11,475		$	94.32
Vested	(5,100	)	90.71
Granted	3,927		105.62
Reinvested Dividends	332		N/A
Forfeited / Expired	(163	)	99.70
Nonvested at December 31, 2017	10,471		$	99.16	1.38	$	1,248
Restricted Units Expected to Vest	10,325		$	99.20	1.38	$	1,230

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 2017, 2016 and 2015 was $105.62, $97.04 and $100.63, respectively. The total fair value of Restricted Units vested was $534, $445 and $564 million in 2017, 2016 and 2015, respectively. As of December 31, 2017, there was $475 million of total unrecognized compensation cost related to nonvested Restricted Units. That cost is expected to be recognized over a weighted-average period of three years and one month.

Long-Term Incentive Performance Award Program granted after 2013

We award Restricted Units in conjunction with our Long-Term Incentive Performance Award program to certain eligible employees. Beginning with the Long-Term Incentive Performance grant in 2014, the performance targets are equally-weighted among consolidated operating return on invested capital, growth in currency-constant consolidated revenue and total shareowner return relative ("RTSR") to a peer group of companies. The Restricted Units granted under this award vest at the end of a three-year period (except in the case of death, in which case immediate vesting occurs on a prorated basis. In the case of disability and retirement, vesting occurs at the end of the three-year period on a prorated basis). The number of Restricted Units earned will be based on the percentage achievement of the performance targets set forth on the grant date. The range of percentage achievement can vary from 0% to 200% of the target award.

For the two-thirds of the award related to consolidated operating return on invested capital and growth in currency-constant consolidated revenue, we recognize the grant date fair value of these 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. This portion of the award is recognized as compensation expense (less estimated forfeitures) ratably over the vesting period.

The weighted-average assumptions used, by year, and the calculated weighted-average fair values of the RTSR portion of the grants, are as follows:



	2017			2016			2015
Risk-free interest rate	1.46		%	1.00		%	0.89		%
Expected volatility	16.59		%	16.46		%	15.53		%
Weighted-average fair value of units granted	$	119.29		$	136.18		$	63.64
Share payout	113.55		%	129.08		%	65.86		%

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

As of December 31, 2017, we had the following Restricted Units outstanding, including reinvested dividends, that were granted under our Long-Term Incentive Performance Award program:



	Shares (in thousands)		Weighted-Average Grant Date Fair Value		Weighted-Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in millions)
Nonvested at January 1, 2017	1,683		$	101.36
Vested	(839	)	97.11
Granted	958		105.65
Reinvested Dividends	73		N/A
Forfeited / Expired	(88	)	103.87
Nonvested at December 31, 2017	1,787		$	105.58	1.53	$	213
Performance Units Expected to Vest	1,699		$	105.72	1.54	$	202

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 2017, 2016 and 2015 was $105.65, $105.50 and $96.64, respectively. The total fair value of Restricted Units vested was $71, $13 and $5 million in 2017, 2016 and 2015, respectively. As of December 31, 2017, there was $100 million of total unrecognized compensation cost related to nonvested Restricted Units. That cost is expected to be recognized over a weighted-average period of one year and nine months.

Non-qualified Stock Options

We maintain fixed 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.

Executive officers and certain senior managers receive a non-qualified stock option grant 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 date of the grant. All options granted are subject to earlier cancellation or vesting under certain conditions. The options granted will expire ten years after the date of the grant. Option holders may exercise their options via the tender 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:



	Shares (in thousands)		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in millions)
Outstanding at January 1, 2017	1,828		$	80.45
Exercised	(802	)	71.57
Granted	272		106.87
Forfeited / Expired	(7	)	70.90
Outstanding at December 31, 2017	1,291		$	91.58	6.30	$	36
Options Vested and Expected to Vest	1,291		$	91.58	6.30	$	36
Exercisable at December 31, 2017	757		$	83.28	4.80	$	27

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:



	2017			2016			2015
Expected dividend yield	2.89		%	2.95		%	2.63		%
Risk-free interest rate	2.15		%	1.62		%	2.07		%
Expected life in years	7.5			7.5			7.5
Expected volatility	17.81		%	22.40		%	20.61		%
Weighted-average fair value of options granted	$	14.70		$	16.46		$	18.07

Expected volatilities are based on the historical returns on our stock and the implied volatility of our publicly-traded options. 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.

We received cash of $41, $72 and $56 million during 2017, 2016 and 2015, respectively, from option holders resulting from the exercise of stock options. The total intrinsic value of options exercised during 2017, 2016 and 2015 was $22, $24 and $31 million, respectively. As of December 31, 2017, there was $1 million of total unrecognized compensation cost related to nonvested options. That cost is expected to be recognized over a weighted-average period of three years and six months.

The following table summarizes information about stock options outstanding and exercisable at December 31, 2017:



	Options Outstanding				Options Exercisable
Exercise Price Range	Shares (in thousands)	Weighted-Average Remaining Contractual Term (in years)	Weighted-Average Exercise Price		Shares (in thousands)	Weighted-Average Exercise Price
$55.01 - $70.00	131	1.89	$	61.97	131	$	61.97
$70.01 - $80.00	223	3.30	75.12		223	75.12
$80.01 - $90.00	141	5.17	82.88		127	82.87
$90.01 - $110.00	796	8.07	102.59		276	100.11
	1,291	6.30	$	91.58	757	$	83.28

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, 0.9 and 0.9 million shares at average prices of $108.98, $99.27 and $95.41 per share during 2017, 2016 and 2015, respectively. This plan is not considered to be compensatory, and therefore no compensation cost is measured for the employees’ purchase rights.