Annual report pursuant to Section 13 and 15(d)

STOCK-BASED COMPENSATION

v3.19.3.a.u2
STOCK-BASED COMPENSATION
 12 Months Ended
Dec. 31, 2019
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 13 million shares available to be issued under the Incentive Compensation Plan as of December 31, 2019.
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 $915, $634 and $584 million during 2019, 2018 and 2017, respectively. The associated income tax benefit recognized in our statements of consolidated income was $216, $186 and $227 million during 2019, 2018 and 2017, respectively. The cash income tax benefit received from the exercise of stock options and the lapsing of Restricted Units was $148, $175 and $276 million during 2019, 2018 and 2017, 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 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 under the MIP prior to 2019 vest over a five-year period with approximately 20% of the award vesting at each anniversary date of the grant. The grant value, 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. These historical awards will continue to vest through 2023.
Beginning with the MIP award 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, 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 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.
Coyote Restricted Stock Award
In August 2015 we acquired Coyote, a U.S.-based truckload brokerage company. During the third quarter of 2015, we granted Restricted Units to eligible Coyote management employees. The vesting of Restricted Units granted under this award varied between one and four years with an equal number of restricted units vesting at each anniversary date, except in the case of death or disability, in which case immediate vesting occurred. The entire grant was expensed on a straight-line basis over the requisite service period, except in the case of death or disability, in which case immediate expensing occurred. All Restricted Units granted under this award had vested as of December 31, 2019.
As of December 31, 2019, we had the following outstanding Restricted Units, including reinvested dividends, granted under the MIP:
 
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, 2019
10,139

 
$
104.47

 
 
 
 
Vested
(5,100
)
 
102.54

 
 
 
 
Granted
5,516

 
108.78

 
 
 
 
Reinvested Dividends
410

 
N/A

 
 
 
 
Forfeited / Expired
(226
)
 
107.22

 
 
 
 
Nonvested at December 31, 2019
10,739

 
$
106.94

 
0.71
 
$
1,257

Restricted Units Expected to Vest
12,690

 
$
106.59

 
0.74
 
$
1,485


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 2019, 2018 and 2017 was $108.78, $110.95 and $105.62, respectively. The total fair value of Restricted Units vested was $457, $596 and $534 million in 2019, 2018 and 2017, respectively. As of December 31, 2019, there was $341 million of total unrecognized compensation cost related to nonvested Restricted Units. That cost is expected to be recognized over a weighted-average period of two years and one month.
Long-Term Incentive Performance ("LTIP") Program
We award Restricted Units in conjunction with our LTIP program to certain eligible employees. Performance targets are equally-weighted among consolidated operating return on invested capital, growth in currency-constant consolidated revenue and total shareowner return relative to a peer group of companies ("RTSR"). The Restricted Units granted under this award vest at the end of a three-year 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 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, less estimated forfeitures, is recognized as compensation expense 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:
 
2019
 
2018
 
2017
Risk-free interest rate
2.23
%
 
2.61
%
 
1.46
%
Expected volatility
19.64
%
 
16.51
%
 
16.59
%
Weighted-average fair value of units granted
$
123.44

 
$
137.57

 
$
119.29

Share payout
115.04
%
 
123.47
%
 
113.55
%

There is no expected dividend yield as units earn dividend equivalents.
As of December 31, 2019, we had the following Restricted Units outstanding, including reinvested dividends, that were granted under our LTIP 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, 2019
1,701

 
$
108.63

 
 
 
 
Vested
(898
)
 
106.12

 
 
 
 
Granted
974

 
107.30

 
 
 
 
Reinvested Dividends
83

 
N/A

 
 
 
 
Forfeited / Expired
(169
)
 
108.60

 
 
 
 
Nonvested at December 31, 2019
1,691

 
$
109.18

 
1.54
 
$
198

Restricted Units Expected to Vest
1,677

 
$
109.16

 
1.55
 
$
196


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 2019, 2018 and 2017 was $107.30, $111.42 and $105.65, respectively. The total fair value of Restricted Units vested was $71, $97 and $71 million in 2019, 2018 and 2017, respectively. As of December 31, 2019, there was $103 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 eight months.
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.
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 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:
 
Shares
(in thousands)
 
Weighted-Average
Exercise
Price
 
Weighted-Average  Remaining
Contractual Term
(in years)
 
Aggregate Intrinsic
Value (in millions)
Outstanding at January 1, 2019
1,384

 
$
95.36

 
 
 
 
Exercised
(147
)
 
69.33

 
 
 
 
Granted
261

 
111.68

 
 
 
 
Forfeited / Expired
—

 
—

 
 
 
 
Outstanding at December 31, 2019
1,498

 
$
100.74

 
6.37
 
$
24

Options Vested and Expected to Vest
1,498

 
$
100.74

 
6.37
 
$
24

Exercisable at December 31, 2019
915

 
$
96.12

 
5.25
 
$
19



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:
 
2019
 
2018
 
2017
Expected dividend yield
2.94
%
 
2.93
%
 
2.89
%
Risk-free interest rate
2.60
%
 
2.84
%
 
2.15
%
Expected life in years
7.5

 
7.5

 
7.5

Expected volatility
17.79
%
 
16.72
%
 
17.81
%
Weighted-average fair value of options granted
$
16.34

 
$
15.23

 
$
14.70


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 $7, $12 and $41 million during 2019, 2018 and 2017, respectively, from option holders resulting from the exercise of stock options. The total intrinsic value of options exercised during 2019, 2018 and 2017 was $5, $6 and $22 million, respectively. As of December 31, 2019, there was $2 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 five months.
The following table summarizes information about stock options outstanding and exercisable at December 31, 2019:
 
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
$65.01 - $80.00
157

 
1.52
 
$
74.06

 
157

 
$
74.06

$80.01 - $95.00
100

 
3.17
 
82.89

 
100

 
82.89

$95.01 - $110.00
985

 
6.75
 
103.93

 
635

 
103.09

$110.01 - $125.00
256

 
9.13
 
111.80

 
23

 
111.80

 
1,498

 
6.37
 
$
100.74

 
915

 
$
96.12


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 1, 0.9 and 0.9 million shares at average prices of $102.11, $105.53 and $108.98 per share, during 2019, 2018 and 2017, respectively. This plan is not considered to be compensatory, and therefore no compensation cost is measured for the employees’ purchase rights.