Xerox Holdings CorpXRX
Xerox Holdings Corp Stock Compensation Disclosure
Stock-Based Compensation
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(shares in thousands, unless otherwise noted)
We have a long-term incentive plan whereby eligible employees may be granted restricted stock units (RSUs), performance share units (PSUs) and stock options (SOs). We grant stock-based compensation awards in order to continue to attract and retain qualified employees and to better align employees' interests with those of our shareholders. Each of these awards is subject to settlement with newly issued shares of Xerox Holdings Corporation's common stock. At December 31, 2024 and 2023, 5 million and 6 million shares, respectively, were available for grant of awards.
Stock-based compensation expense was as follows:
| Year Ended December 31, | ||||||||||||||||||||
| 2024 | 2023 | 2022 | ||||||||||||||||||
Stock-based compensation expense, pre-tax(1) | $ | 52 | $ | 54 | $ | 75 | ||||||||||||||
| Income tax benefit recognized in earnings | 8 | 10 | 11 | |||||||||||||||||
(1)2022 includes $21 associated with the accelerated vesting of all outstanding equity awards, according to the terms of the award agreement, in connection with the passing of Xerox Holding's former CEO.
Restricted Stock Units
Compensation expense for RSUs is based upon the grant-date market price and is recognized on a straight-line basis over the vesting period, based on management's estimate of the number of shares expected to vest. RSUs granted in 2022 through 2024 vest on a graded schedule as follows: 33% after one year of service, 33% after two years of service, and 34% after three years of service from the date of grant.
Performance Share Units
PSU awards are comprised of performance-based components (Operating income improvement and Earnings per share) as well as market-based components (Relative Total Shareholder Return (RTSR) and Absolute Share Price). PSUs granted in 2024 are entirely performance-based with an RTSR modifier - see Market-Based Component below. PSUs granted in 2023 are entirely market-based, and PSUs granted in 2022 are one-half performance-based and one-half market-based. The metrics and weightings are as follows:
| Award Year (Metric Weighting) | ||||||||||||||||||||
| Performance Metric | 2024 | 2023 | 2022 | |||||||||||||||||
Operating income improvement(1) | 100 | % | — | % | — | % | ||||||||||||||
| Earnings per share | — | % | — | % | 50 | % | ||||||||||||||
| Relative total shareholder return | — | % | 100 | % | — | % | ||||||||||||||
| Absolute share price | — | % | — | % | 50 | % | ||||||||||||||
| 100 | % | 100 | % | 100 | % | |||||||||||||||
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(1)PSUs granted in 2024 are performance-based (Operating income improvement metric) with an RTSR modifier which can increase or decrease the number of shares that ultimately vest by 25%.
The measures are independent of each other and depending on the achievement of these metrics, a recipient of a PSU award is entitled to receive a number of shares equal to a percentage, ranging from 0% to 200% of the PSU award granted. All PSUs granted have a three-year cliff vesting from the date of grant.
Performance-Based Component: This PSU component vests contingent upon meeting predetermined annual and/or cumulative performance metrics. The 2024 PSU metric vests contingent upon meeting predetermined, annual as well as cumulative Operating income improvement goals established for four discrete performance periods (2024, 2025 and 2026) weighted 20%, respectively, and a three-year cumulative goal (2024-2026) weighted 40%. The 2022 PSU metric, Earnings per share, vests contingent upon meeting a three-year cumulative goal (2022-2024). The fair value of this PSU component is based upon the grant-date market price for the underlying stock. Compensation expense is recognized on a straight-line basis over a three-year vesting period, based on management's estimate of the number of shares expected to vest and based on meeting the performance metrics. If actual results exceed the stated targets, all plan participants have the potential to earn additional shares of common stock up to a maximum over-achievement of 100% of the original grant. If the stated targets are not met, any recognized compensation cost would be reversed.
Market-Based Component: The RTSR metric, included as part of the 2024 PSU, is based on Xerox Holdings Corporation's stock price appreciation, inclusive of dividends paid, measured over three equally weighted performance periods (2024, 2024-2025, and 2024-2026). RTSR will be determined by ranking Xerox Holdings Corporation and the companies within the S&P 600 Information Technology Index, as approved by the Compensation and Human Capital Committee of the Board, from highest to lowest according to their respective TSRs, for each of the three performance periods. Payout for this portion of the 2024 PSU will be determined based on the average RTSR of the three measurement periods, and based on these results, the RTSR modifier can increase or decrease the number of shares that ultimately vest by 25%. Final payout will be determined based on the cumulative results of the four individually weighted measurement periods of Xerox’s Operating income improvement metric, and depending on the RTSR performance, a potential increase or decrease of 25%, with a maximum over-achievement of 100% of the original grant. The RTSR metric, included as part of the 2023 PSU, is based on Xerox Holdings Corporation's stock price appreciation, inclusive of dividends paid, measured over three equally weighted performance periods (2023, 2023-2024, and 2023-2025). RTSR will be determined by ranking Xerox Holdings Corporation and the companies within two distinct market indices, as approved by the Compensation and Human Capital Committee of the Board, from highest to lowest according to their respective TSRs, for each of the three performance periods. Payout for the 2023 PSU will be determined based on the weighted average of Xerox Holdings Corporation's payout for each of the three performance periods. The Absolute Share Price metric, included as the market-based component of the 2022 PSU grant, is based on Xerox Holdings Corporation's average closing price for the last 20 trading days of the three-year performance period, inclusive of dividends during that period. Payout for these portions of the PSU metrics will be determined based on total return targets. Since these metrics represent market conditions, Monte Carlo simulations were used to determine their respective grant-date fair values.
A summary of Xerox Holding's key valuation input assumptions used in the Monte Carlo simulation relative to awards granted were as follows:
| 2024 Award | 2023 Award | 2022 Award | ||||||||||||||||||
| Term | 3 years | 3 years | 3 years | |||||||||||||||||
Risk-free interest rate(1) | 4.20 | % | 3.80 | % | 1.09 | % | ||||||||||||||
Volatility(2) | 42.88 | % | 52.21 | % | 42.07 | % | ||||||||||||||
Weighted average fair value(3) | $ | 18.29 | $ | 23.00 | $ | 27.89 | ||||||||||||||
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(1)The risk-free interest rate was based on the zero-coupon U.S. Treasury yield curve on the valuation date, with a maturity matched to the performance period.
(2)Volatility is derived from historical stock prices as well as implied volatility when appropriate and available.
(3)The weighted average of fair values used to record compensation expense as determined by the Monte Carlo simulation.
Our RTSR and Absolute Share Price metrics are compared against total return targets to determine the payout as follows:
| 2024 | 2023 | 2022 | ||||||||||||||||||
| Payout Percentage | Percentile Ranking Return Targets(1) | Percentile Ranking Return Targets(1) | Total Return Targets(1) | |||||||||||||||||
| 200% | n/a | 75th and above | $30.00 and above | |||||||||||||||||
| 100% | n/a | 50th | $ | 25.00 | ||||||||||||||||
| 50% | n/a | 25th | $ | 20.00 | ||||||||||||||||
| 25% | 75th and above | n/a | n/a | |||||||||||||||||
| 0% | 50th | Below 25th | Below $20.00 | |||||||||||||||||
| (25)% | 25th and below | n/a | n/a | |||||||||||||||||
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(1)For performance between the levels described above, the degree of vesting is interpolated on a linear basis.
Compensation expense for the market-based component of the PSU awards is recognized on a straight-line basis over the vesting period based on the fair value determined by the Monte Carlo simulation and, except in cases of employee forfeiture, cannot be reversed regardless of performance.
Note: With respect to all stock-based compensation programs, Management’s estimate of the number of shares expected to vest at the time of grant reflects an estimate for forfeitures based on our historical forfeiture rate to date. Should actual forfeitures differ from management’s estimate, the activity will be reflected in a subsequent period. In addition, RSUs, PSUs and SOs awarded to employees who are retirement-eligible at the date of grant, become retirement-eligible during the vesting period, or are terminated not-for-cause (e.g., as part of a restructuring initiative), vest based on service provided from the date of grant to the date of separation.
Summary of Stock-based Compensation Activity
| 2024 | 2023 | 2022 | ||||||||||||||||||||||||||||||||||||
| Shares | Weighted Average Grant Date Fair Value | Shares | Weighted Average Grant Date Fair Value | Shares | Weighted Average Grant Date Fair Value | |||||||||||||||||||||||||||||||||
Restricted Stock Units | ||||||||||||||||||||||||||||||||||||||
| Outstanding at January 1 | 4,672 | $ | 18.46 | 3,221 | $ | 23.16 | 3,161 | $ | 25.26 | |||||||||||||||||||||||||||||
Granted(1) | 4,159 | 14.09 | 3,382 | 16.56 | 2,444 | 21.75 | ||||||||||||||||||||||||||||||||
Vested(2) | (2,030) | 19.04 | (1,593) | 23.73 | (1,975) | 24.56 | ||||||||||||||||||||||||||||||||
| Forfeited | (487) | 17.27 | (338) | 19.27 | (409) | 24.20 | ||||||||||||||||||||||||||||||||
| Outstanding at December 31 | 6,314 | 15.48 | 4,672 | 18.46 | 3,221 | 23.16 | ||||||||||||||||||||||||||||||||
| Performance Shares | ||||||||||||||||||||||||||||||||||||||
| Outstanding at January 1 | 2,039 | $ | 24.18 | 1,729 | $ | 28.38 | 2,818 | $ | 25.47 | |||||||||||||||||||||||||||||
| Granted | 1,243 | 13.89 | 940 | 22.97 | 977 | 25.72 | ||||||||||||||||||||||||||||||||
Vested (2) | — | — | — | — | (644) | 27.95 | ||||||||||||||||||||||||||||||||
Forfeited/Expired (3) | (1,216) | 17.67 | (630) | 33.86 | (1,422) | 20.98 | ||||||||||||||||||||||||||||||||
| Outstanding at December 31 | 2,066 | 21.59 | 2,039 | 24.18 | 1,729 | 28.38 | ||||||||||||||||||||||||||||||||
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(1)2023 includes approximately 445 RSUs associated with a special retention award.
(2)2022 includes approximately 469 RSUs and 644 PSUs associated with the accelerated vesting of all outstanding equity awards, according to the terms of the award agreement, in connection with the passing of Xerox Holding's former CEO. No other PSUs vested in 2022.
(3)2022 includes approximately 1,125 PSUs granted in 2019 that were adversely affected permanently by the impacts from the COVID-19 pandemic, and therefore no shares were earned.
Unrecognized compensation cost related to non-vested stock-based awards at December 31, 2024 was as follows:
| Awards | Unrecognized Compensation | Remaining Weighted-Average Vesting Period (Years) | ||||||||||||
| Restricted Stock Units | $ | 52 | 1.9 | |||||||||||
| Performance Shares | 15 | 1.8 | ||||||||||||
Stock Options(1) | 3 | 2.0 | ||||||||||||
| Total | $ | 70 | ||||||||||||
(1)Reflects CareAR SOs granted in May 2022.
The aggregate intrinsic value of outstanding stock-based awards was as follows:
| Awards | December 31, 2024 | |||||||
| Restricted Stock Units | $ | 53 | ||||||
| Performance Shares | 17 | |||||||
The intrinsic value and actual tax benefit realized for all vested and exercised stock-based awards was as follows:
| December 31, 2024 | December 31, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||||||||||
| Awards | Total Intrinsic Value | Tax Benefit | Total Intrinsic Value | Tax Benefit | Total Intrinsic Value | Tax Benefit | ||||||||||||||||||||||||||||||||
| Restricted Stock Units | $ | 31 | $ | 4 | $ | 25 | $ | 5 | $ | 39 | $ | 6 | ||||||||||||||||||||||||||
| Performance Share Units | — | — | — | — | 10 | — | ||||||||||||||||||||||||||||||||
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.