ILLINOIS TOOL WORKS INCITW
ILLINOIS TOOL WORKS INC Stock Compensation Disclosure
Stock-Based Compensation
On May 3, 2024, the 2024 Long-Term Incentive Plan (the "2024 Plan") was approved by shareholders, and became effective on June 30, 2024 (the "Effective Date"). Subsequent to the Effective Date, no additional awards will be granted to employees under the 2015 Long-Term Incentive Plan (the "2015 Plan"). The 2024 Plan allows for the issuance of up to 11.5 million shares of ITW common stock for awards granted under the plan, of which 3.5 million shares were subject to awards outstanding under the 2015 Plan as of the Effective Date and are available for rollover should the awards expire, terminate or be forfeited. The significant terms of stock options and restricted stock units ("RSUs") were not changed under the 2024 Plan. Stock options and RSUs are issued to officers and/or other management employees under these plans. Stock options generally vest over a four-year period and have an expiration of ten years from the issuance date. RSUs generally "cliff" vest after a three-year period and include units with and without performance criteria. RSUs with performance criteria provide for full "cliff" vesting after three years if the Compensation Committee of the Board of Directors certifies that the performance goals have been met. Upon vesting, the holder will receive one share of common stock of the Company for each vested restricted stock unit. The Company generally issues shares from treasury stock to cover exercised options and vested RSUs.
The Company records compensation expense for the grant-date fair value of stock awards over the remaining service periods of those awards. The following table summarizes the Company's stock-based compensation expense for the twelve months ended December 31, 2025, 2024 and 2023:
| In millions | 2025 | 2024 | 2023 | ||||||||||||||
| Pre-tax stock-based compensation expense | $ | 69 | $ | 61 | $ | 69 | |||||||||||
| Tax benefit | (7) | (8) | (7) | ||||||||||||||
| Total stock-based compensation expense, net of tax | $ | 62 | $ | 53 | $ | 62 | |||||||||||
The following table summarizes activity related to non-vested RSUs for the twelve months ended December 31, 2025:
| Shares in millions | Number of Shares | Weighted-Average Grant-Date Fair Value | |||||||||
| Unvested, January 1, 2025 | 0.6 | $236.70 | |||||||||
| Granted | 0.3 | 254.85 | |||||||||
| Vested | (0.2) | 219.60 | |||||||||
| Canceled | (0.1) | 249.50 | |||||||||
| Unvested, December 31, 2025 | 0.6 | 250.82 | |||||||||
The following table summarizes stock option activity for the twelve months ended December 31, 2025:
| In millions except exercise price and contractual terms | Number of Shares | Weighted-Average Exercise Price | Weighted-Average Remaining Contractual Term | Aggregate Intrinsic Value | |||||||||||||||||||
| Under option, January 1, 2025 | 2.7 | $190.79 | |||||||||||||||||||||
| Granted | 0.2 | 258.11 | |||||||||||||||||||||
| Exercised | (0.4) | 150.18 | |||||||||||||||||||||
| Under option, December 31, 2025 | 2.5 | 203.75 | 5.4 | $112 | |||||||||||||||||||
| Exercisable, December 31, 2025 | 1.9 | 189.68 | 4.6 | $107 | |||||||||||||||||||
The fair value of RSUs is equal to the common stock fair market value on the date of the grant. RSUs provide for dividend equivalents payable in additional RSUs for dividends that would have been paid during the vesting period. Stock option exercise prices are equal to the common stock fair market value on the date of grant. The Company estimates forfeitures based on historical rates for awards with similar characteristics. The Company uses a binomial option pricing model to estimate the fair value of the stock options granted. The following summarizes the assumptions used in the option valuations for the twelve months ended December 31, 2025, 2024 and 2023:
| 2025 | 2024 | 2023 | |||||||||||||||
| Risk-free interest rate | 4.30-4.67% | 4.22-4.90% | 3.92-4.86% | ||||||||||||||
| Weighted-average volatility | 21.0% | 20.0% | 22.0% | ||||||||||||||
| Dividend yield | 2.25% | 2.21% | 2.13% | ||||||||||||||
| Expected years until exercise | 8.3-9.3 | 8.3-9.5 | 8.6-9.2 | ||||||||||||||
Lattice-based option valuation models, such as the binomial option pricing model, incorporate ranges of assumptions for inputs. The risk-free rate of interest for periods within the contractual life of the option is based on a zero-coupon U.S. government instrument over the contractual term of the equity instrument. Expected volatility is based on implied volatility from traded options on the Company's stock and historical volatility of the Company's stock. The Company uses historical data to estimate option exercise timing and employee termination rates within the valuation model. The weighted-average dividend yield is based on historical information. The expected term of options granted is derived from the output of the option valuation model and represents the period of time that options granted are expected to be outstanding. The ranges presented result from separate groups of employees assumed to exhibit different exercise behavior.
The weighted-average grant-date fair value of stock options granted for the twelve months ended December 31, 2025, 2024 and 2023 was $71.97, $68.98 and $67.16 per share, respectively. The aggregate intrinsic value of stock options exercised during the twelve months ended December 31, 2025, 2024 and 2023 was $49 million, $55 million and $79 million, respectively. Exercise of stock options during the twelve months ended December 31, 2025, 2024 and 2023 resulted in cash receipts of $65 million, $52 million and $53 million, respectively. The total grant-date fair value of vested stock option awards during the twelve months ended December 31, 2025, 2024 and 2023 was $18 million, $18 million and $18 million, respectively. As of December 31, 2025, there was $10 million of total unrecognized compensation cost related to unvested stock options. That cost is expected to be recognized over a weighted-average period of 1.9 years.
The weighted-average grant-date fair value of RSU awards granted for the twelve months ended December 31, 2025, 2024 and 2023 was $254.85, $243.77 and $232.21, respectively. The total grant-date fair value of vested RSU awards during the twelve months ended December 31, 2025, 2024 and 2023 was $46 million, $52 million and $35 million, respectively. As of December 31, 2025, there was $57 million of total unrecognized compensation cost related to unvested RSUs. That cost is expected to be recognized over a weighted-average remaining contractual life of 1.8 years.
About Stock Compensation Disclosures
Stock-based compensation disclosures detail the equity awards granted to employees and executives — including stock options, restricted stock units (RSUs), and performance shares — along with the valuation methods and assumptions used to expense them. This section reveals the true cost of talent retention and the alignment between management incentives and shareholder interests.
Key signals: total unrecognized compensation expense and its expected recognition period signal future earnings headwinds from already-granted awards. For stock options, examine Black-Scholes assumptions — expected volatility, risk-free rate, and expected term — as understating any of these reduces reported compensation expense. Compare stock compensation expense as a percentage of revenue against peers to assess dilution cost. Watch vesting schedules for acceleration clauses tied to change-of-control events. Performance-based awards with undemanding targets may indicate weak governance. Add back stock compensation to operating cash flow to calculate a more conservative free cash flow figure.