Share-Based Compensation
We maintain a long-term incentive plan (the Plan) for key team members and non-employee members of our Board of Directors. The Plan allows us to grant equity-based compensation awards, including stock options, stock appreciation rights, performance share units, restricted stock units, restricted stock awards or a combination of awards (collectively, share-based awards). The number of unissued common shares reserved for future grants under the Plan was 18.7 million and 24.9 million at February 1, 2014 and February 2, 2013, respectively.
Compensation expense associated with share-based awards is recognized on a straight-line basis over the shorter of the vesting period or the minimum required service period. Total share-based compensation expense recognized in the Consolidated Statements of Operations was $110 million, $105 million and $90 million in 2013, 2012 and 2011, respectively. The related income tax benefit was $43 million, $42 million and $35 million in 2013, 2012 and 2011, respectively.
Stock Options
Through 2013, we granted nonqualified stock options to certain team members that generally vest and become exercisable annually in equal amounts over a four-year period and expire 10 years after the grant date. We previously granted options with a ten-year term to the non-employee members of our Board of Directors that vest immediately, but are not exercisable until one year after the grant date. We used a Black-Scholes valuation model to estimate the fair value of the options at the grant date.
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Stock Option Activity | Stock Options |
| Total Outstanding | | Exercisable |
| Number of Options (a) |
| Exercise Price (b) |
| Intrinsic Value (c) |
| | Number of Options (a) |
| Exercise Price (b) |
| Intrinsic Value (c) |
|
February 2, 2013 | 34,458 |
| $ | 50.60 |
| $ | 366 |
| | 21,060 |
| $ | 48.25 |
| $ | 273 |
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Granted | 226 |
| 69.56 |
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| | |
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| |
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Expired/forfeited | (745 | ) | 53.14 |
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Exercised/issued | (9,085 | ) | 46.51 |
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February 1, 2014 | 24,854 |
| $ | 52.19 |
| $ | 136 |
| | 16,824 |
| $ | 50.64 |
| $ | 109 |
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(b) | Weighted average per share. |
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(c) | Represents stock price appreciation subsequent to the grant date, in millions. |
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Black-Scholes Model Valuation Assumptions | 2013 |
| 2012 |
| 2011 |
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Dividend yield | 2.4 | % | 2.4 | % | 2.5 | % |
Volatility (a) | 22 | % | 23 | % | 27 | % |
Risk-free interest rate (b) | 1.4 | % | 1.0 | % | 1.0 | % |
Expected life in years (c) | 5.5 |
| 5.5 |
| 5.5 |
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Stock options grant date fair value | $ 11.14 | $ 9.70 | $ 9.20 |
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(a) | Volatility represents an average of market estimates for implied volatility of Target common stock. |
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(b) | The risk-free interest rate is an interpolation of the relevant U.S. Treasury security maturities as of each applicable grant date. |
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(c) | The expected life is estimated based on an analysis of options already exercised and any foreseeable trends or changes in recipients' behavior. |
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Stock Option Exercises (millions) | 2013 |
| 2012 |
| 2011 |
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Cash received for exercise price | $ | 422 |
| $ | 331 |
| $ | 93 |
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Intrinsic value | 197 |
| 139 |
| 27 |
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Income tax benefit | 77 |
| 55 |
| 11 |
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At February 1, 2014, there was $37 million of total unrecognized compensation expense related to nonvested stock options, which is expected to be recognized over a weighted average period of 1.1 years. The weighted average remaining life of exercisable options is 5.3 years, and the weighted average remaining life of all outstanding options is 6.2 years. The total fair value of options vested was $53 million, $68 million and $75 million in 2013, 2012 and 2011, respectively.
Performance Share Units
We issue performance share units to certain team members that represent shares potentially issuable in the future. Issuance is based upon our performance relative to a retail peer group over a three-year performance period on certain measures including domestic market share change, return on invested capital and EPS growth. The fair value of performance share units is calculated based on the stock price on the date of grant. The weighted average grant date fair value for performance share units was $57.22, $58.61 and $48.63 in 2013, 2012 and 2011, respectively.
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Performance Share Unit Activity | Total Nonvested Units |
| Performance Share Units (a) |
| Grant Date Fair Value (b) |
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February 2, 2013 | 1,256 |
| $ | 51.53 |
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Granted | 2,036 |
| 57.22 |
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Forfeited | (145 | ) | 56.42 |
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Vested | (277 | ) | 51.49 |
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February 1, 2014 | 2,870 |
| $ | 55.37 |
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(a) | Assumes attainment of maximum payout rates as set forth in the performance criteria based in thousands of share units. Applying actual or expected payout rates, the number of outstanding units at February 1, 2014 was 1,515 thousand. |
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(b) | Weighted average per unit. |
The expense recognized each period is dependent upon our estimate of the number of shares that will ultimately be issued. Future compensation expense for unvested awards could reach a maximum of $127 million assuming payout of all unvested awards. The unrecognized expense is expected to be recognized over a weighted average period of 1.2 years. The fair value of performance share units vested and converted was $14 million in 2013, $16 million in 2012 and was not significant in 2011.
Restricted Stock
We issue restricted stock units and performance-based restricted stock units with three-year cliff vesting from the grant date (collectively restricted stock) to certain team members. The final number of shares issued under performance-based restricted stock units will be based on our total shareholder return relative to a retail peer group over a three-year performance period. We also regularly issue restricted stock units to our Board of Directors, which vest quarterly over a one-year period and are settled in shares of Target common stock upon departure from the Board. The fair value for restricted stock is calculated based on the stock price on the date of grant, incorporating an analysis of the total shareholder return performance measure where applicable. The weighted average grant date fair value for restricted stock was $62.76, $60.44 and $49.42 in 2013, 2012 and 2011, respectively.
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Restricted Stock Activity | Total Nonvested Units |
| Restricted Stock (a) |
| Grant Date Fair Value (b) |
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February 2, 2013 | 2,895 |
| $ | 56.12 |
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Granted | 1,686 |
| 62.76 |
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Forfeited | (130 | ) | 57.19 |
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Vested | (516 | ) | 54.26 |
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February 1, 2014 | 3,935 |
| $ | 58.98 |
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(a) | Represents the number of restricted stock units, in thousands. For performance-based restricted stock units, assumes attainment of maximum payout rates as set forth in the performance criteria based in thousands of share units. Applying actual or expected payout rates, the number of outstanding restricted stock units at February 1, 2014 was 3,551 thousand. |
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(b) | Weighted average per unit. |
The expense recognized each period is partially dependent upon our estimate of the number of shares that will ultimately be issued. At February 1, 2014, there was $139 million of total unrecognized compensation expense related to restricted stock, which is expected to be recognized over a weighted average period of 1.3 years. The fair value of restricted stock vested and converted to shares of Target common stock was $28 million, $11 million and $9 million in 2013, 2012 and 2011, respectively.
