18. Deferred Compensation Plans.
The Company maintains various deferred compensation plans for the benefit of its employees. The two principal forms of deferred compensation are granted under several stock-based compensation and cash-based compensation plans.
Stock-Based Compensation Plans. The accounting guidance for stock-based compensation requires measurement of compensation cost for stock-based awards at fair value and recognition of compensation cost over the service period, net of estimated forfeitures (see Note 2).
The components of the Company's stock-based compensation expense (net of cancellations) are presented below:
| 2013 | 2012 | 2011 | |||||
| (dollars in millions) | |||||||
| Restricted stock units(1) | $ | 1,140 | $ | 864 | $ | 1,057 | |
| Stock options | 15 | 4 | 24 | ||||
| Performance-based stock units | 29 | 29 | 32 | ||||
| Total(2) | $ | 1,184 | $ | 897 | $ | 1,113 | |
(1) Amounts for 2013, 2012 and 2011 include $25 million, $31 million and $186 million, respectively, related to stock-based awards that were granted in 2014, 2013 and 2012, respectively, to employees who satisfied retirement-eligible requirements under award terms that do not contain a service period.
(2) Annual expense fluctuations are primarily due to the introduction in 2012 of a new vesting requirement for certain employees who satisfy existing retirement-eligible requirements to provide a one-year advance notice of their intention to retire from the Company. As such, expense recognition for these awards begins after the grant date (see Note 2).
The table above excludes stock-based compensation expense recorded in discontinued operations, which was approximately $3 million in 2012. See Note 1 for additional information on discontinued operations.
The tax benefit related to stock-based compensation expense was $371 million, $306 million and $383 million for 2013, 2012 and 2011, respectively. The tax benefit for stock-based compensation expense included in discontinued operations was $1 million in 2012.
At December 31, 2013, the Company had $749 million of unrecognized compensation cost related to unvested stock-based awards. Absent estimated or actual forfeitures or cancellations, this amount of unrecognized compensation cost will be recognized as $470 million in 2014, $205 million in 2015 and $74 million thereafter. These amounts do not include 2013 performance year awards granted in January 2014, which will begin to be amortized in 2014.
In connection with awards under its stock-based compensation plans, the Company is authorized to issue shares of its common stock held in treasury or newly issued shares. At December 31, 2013, approximately 107 million shares were available for future grant under these plans.
The Company generally uses treasury shares, if available, to deliver shares to employees and has an ongoing repurchase authorization that includes repurchases in connection with awards granted under its stock-based compensation plans. Share repurchases by the Company are subject to regulatory approval. See Note 15 for additional information on the Company's share repurchase program.
Restricted Stock Units. The Company has granted restricted stock unit awards pursuant to several stock-based compensation plans. The plans provide for the deferral of a portion of certain employees' incentive compensation with awards made in the form of restricted common stock or in the right to receive unrestricted shares of common stock in the future. Awards under these plans are generally subject to vesting over time contingent upon continued employment and to restrictions on sale, transfer or assignment until the end of a specified period, generally one to three years from the date of grant. All or a portion of an award may be canceled if employment is terminated before the end of the relevant restriction period. All or a portion of a vested award also may be canceled in certain limited situations, including termination for cause during the relevant restriction period. Recipients of stock-based awards may have voting rights, at the Company's discretion, and generally receive dividend equivalents.
The following table sets forth activity relating to the Company's vested and unvested RSUs (share data in millions):
| 2013 | |||||||||
| Number of Shares | Weighted Average Grant Date Fair Value | ||||||||
| RSUs at beginning of period | 122 | $ | 24.29 | ||||||
| Granted | 57 | 22.72 | |||||||
| Conversions to common stock | (41) | 28.51 | |||||||
| Canceled | (6) | 22.21 | |||||||
| RSUs at end of period(1) | 132 | $ | 22.41 | ||||||
(1) At December 31, 2013, approximately 121 million RSUs with a weighted average grant date fair value of $22.47 were vested or expected to vest.
The weighted average price for RSUs granted during 2012 and 2011 was $18.09 and $28.94, respectively. At December 31, 2013, the weighted average remaining term until delivery for the Company's outstanding RSUs was approximately 1.3 years.
At December 31, 2013, the intrinsic value of outstanding RSUs was $4,130 million.
The total fair market value of RSUs converted to common stock during 2013, 2012 and 2011 was $939 million, $660 million and $935 million, respectively.
The following table sets forth activity relating to the Company's unvested RSUs (share data in millions):
| 2013 | |||||||||
| Number of Shares | Weighted Average Grant Date Fair Value | ||||||||
| Unvested RSUs at beginning of period | 83 | $ | 23.83 | ||||||
| Granted | 57 | 22.72 | |||||||
| Vested | (36) | 26.67 | |||||||
| Canceled | (6) | 22.19 | |||||||
| Unvested RSUs at end of period(1) | 98 | $ | 22.29 | ||||||
(1) Unvested RSUs represent awards where recipients have yet to satisfy either the explicit vesting terms or retirement-eligible requirements. At December 31, 2013, approximately 87 million unvested RSUs with a weighted average grant date fair value of $22.35 were expected to vest.
| Grant Year | Risk-Free Interest Rate | Expected Life | Expected Stock Price Volatility | Expected Dividend Yield | ||||
| 2013 | 0.6% | 3.9 years | 32.0% | 0.9% | ||||
| 2011 | 2.1% | 5.0 years | 32.7% | 1.5% |
No options were granted during 2012.
The Company's expected option life has been determined based upon historical experience. The expected stock price volatility assumption was determined using the implied volatility of exchange-traded options, in accordance with accounting guidance for share-based payments. The risk-free interest rate was determined based on the yields available on U.S. Treasury zero-coupon issues.
The following table sets forth activity relating to the Company's stock options (options data in millions):
| 2013 | |||||
| Number of Options | Weighted Average Exercise Price | ||||
| Options outstanding at beginning of period | 42 | $ | 48.37 | ||
| Granted | 3 | 22.98 | |||
| Canceled | (12) | 39.93 | |||
| Options outstanding at end of period(1) | 33 | 49.40 | |||
| Options exercisable at end of period | 30 | 52.09 | |||
(1) At December 31, 2013, approximately 30 million options with a weighted average exercise price of $51.50 were vested.
| At December 31, 2013 | Options Outstanding | Options Exercisable | |||||||||||
| Range of Exercise Prices | Number Outstanding | Weighted Average Exercise Price | Average Remaining Life (Years) | Number Exercisable | Weighted Average Exercise Price | Average Remaining Life (Years) | |||||||
| $22.00 - $39.99 | 6 | $ | 26.88 | 4.0 | 3 | $ | 28.94 | 4.0 | |||||
| $40.00 - $49.99 | 15 | 46.51 | 0.2 | 15 | 46.51 | 0.2 | |||||||
| $50.00 - $59.99 | 1 | 52.08 | 2.0 | 1 | 52.08 | 2.0 | |||||||
| $60.00 - $76.99 | 11 | 66.75 | 2.9 | 11 | 66.75 | 2.9 | |||||||
| Total | 33 | 30 | |||||||||||
Performance-Based Stock Units. The Company has granted PSUs to certain senior executives. These PSUs will vest and convert to shares of common stock at the end of the performance period only if the Company satisfies predetermined performance and market goals over the three-year performance period that began on January 1 of the grant year and ends three years later on December 31. Under the terms of the grant, the number of PSUs that will actually vest and convert to shares will be based on the extent to which the Company achieves the specified performance goals during the performance period. Performance-based stock unit awards have vesting, restriction and cancellation provisions that are generally similar to those in restricted stock units.
One-half of the award will be earned based on the Company's return on average common shareholders' equity, excluding the impact of the fluctuation in the Company's credit spreads and other credit factors for certain of the Company's long-term and short-term borrowings, primarily structured notes, that are accounted for at fair value (“MS Average ROE”). For PSUs granted after 2011, the MS Average ROE also excludes certain gains or losses associated with the sale of specified businesses, specified goodwill impairments, certain gains or losses associated with specified legal settlements related to business activities conducted prior to January 1, 2011 and specified cumulative catch-up adjustments resulting from changes in an existing, or application of a new, accounting principle that is not applied on a fully retrospective basis. The number of PSUs ultimately earned for this portion of the awards will be applied by a multiplier as follows:
| Minimum | Maximum | |||||||
| Grant Year | MS Average ROE | Multiplier | MS Average ROE | Multiplier | ||||
| 2013 | Less than 5% | 0.0 | 13% or more | 2.0 | ||||
| 2012 | Less than 6% | 0.0 | 12% or more | 1.5 | ||||
| 2011 | Less than 7.5% | 0.0 | 18% or more | 2.0 | ||||
The fair value per share of this portion of the award for 2013, 2012 and 2011 was $22.85, $18.16 and $29.89, respectively.
One-half of the award will be earned based on the Company's total shareholder return (“TSR”), relative to the S&P Financial Sectors Index (for the 2013 and 2012 awards) and to members of a comparison peer group (for the 2011 award). The number of PSUs ultimately earned for this portion of the awards will be applied by a multiplier as follows:
| Minimum | Maximum | ||||||||||
| Year | Metrics | TSR | Multiplier | TSR | Multiplier | ||||||
| 2013 | Comparison of TSR | Below | Down to 0.0 | Above | Up to 2.0 | ||||||
| 2012 | Comparison of TSR | Below | Down to 0.0 | Above | Up to 1.5 | ||||||
| 2011 | Ranking within the comparison group | Rank 9 or 10 | 0.0 | Rank 1 | 2.0 | ||||||
The fair value per share of this portion of the award for 2013, 2012 and 2011 was $34.65, $20.42 and $43.14, respectively, estimated on the date of grant using a Monte Carlo simulation and the following assumptions:
| Grant Year | Risk-Free Interest Rate | Expected Stock Price Volatility | Expected Dividend Yield | |||
| 2013 | 0.4% | 45.4% | 0.0% | |||
| 2012 | 0.4% | 56.0% | 1.1% | |||
| 2011 | 1.0% | 89.0% | 1.5% |
Because the payout depends on the Company's total shareholder return relative to a comparison group, the valuation also depended on the performance of the stocks in the comparison group as well as estimates of the correlations among their performance. The expected stock price volatility assumption was determined using historical volatility because correlation coefficients can only be developed through historical volatility. The expected dividend yield was based on historical dividend payments. The risk-free interest rate was determined based on the yields available on U.S. Treasury zero-coupon issues.
| 2013 | |||||||||
| Number of Shares | |||||||||
| (in millions) | |||||||||
| PSUs at beginning of period | 5 | ||||||||
| Granted | 1 | ||||||||
| Canceled | (2) | ||||||||
| PSUs at end of period | 4 | ||||||||
Deferred Cash-Based Compensation Plans. The Company maintains various deferred cash-based compensation plans for the benefit of certain current and former employees that provide a return to the plan participants based upon the performance of various referenced investments. The Company often invests directly, as a principal, in investments or other financial instruments to economically hedge its obligations under its deferred cash-based compensation plans. Changes in value of such investments made by the Company are recorded in Trading revenues and Investments revenues.
The components of the Company's deferred compensation expense (net of cancellations) are presented below:
| 2013 | 2012 | 2011 | |||||
| (dollars in millions) | |||||||
| Deferred cash-based awards(1) | $ | 1,490 | $ | 1,815 | $ | 1,809 | |
| Return on referenced investments | 772 | 435 | 132 | ||||
| Total | $ | 2,262 | $ | 2,250 | $ | 1,941 | |
_______________
(1) Amounts for 2013, 2012 and 2011 include $78 million, $93 million and $113 million, respectively, related to deferred cash-based awards that were granted in 2014, 2013 and 2012, respectively, to employees who satisfied retirement-eligible requirements under award terms that do not contain a service period.
The table above excludes deferred cash-based compensation expense recorded in discontinued operations, which was approximately $7 million in 2012 and $7 million in 2011. See Note 1 for additional information on discontinued operations.
At December 31, 2013, the Company had approximately $672 million of unrecognized compensation cost related to unvested deferred cash-based awards (excluding unrecognized expense for returns on referenced investments). Absent actual cancellations and any future return on referenced investments, this amount of unrecognized compensation cost will be recognized as $361 million in 2014, $162 million in 2015 and $149 million thereafter. These amounts do not include 2013 performance year awards granted in January 2014, which will begin to be amortized in 2014.
2013 Performance Year Deferred Compensation Awards. In January 2014, the Company granted approximately $1.2 billion of stock-based awards and $1.4 billion of deferred cash-based awards related to the 2013 performance year that contain a future service requirement. Absent estimated or actual forfeitures or cancellations or accelerations, and any future return on referenced investments, the annual compensation cost for these awards will be recognized as follows:
| 2014 | 2015 | Thereafter | Total | ||||||
| (dollars in millions) | |||||||||
| Stock-based awards | $ | 749 | $ | 309 | $ | 169 | $ | 1,227 | |
| Deferred cash-based awards | 990 | 259 | 142 | 1,391 | |||||
| $ | 1,739 | $ | 568 | $ | 311 | $ | 2,618 | ||