LONG-TERM INCENTIVE COMPENSATION

12 Months Ended

Dec. 31, 2025

Share-Based Payment Arrangement [Abstract]

Stock-Based Awards

Stock-Based Compensation

We generally grant our annual stock-based compensation awards to eligible employees in March and non-employee directors in May. Certain awards granted to retirement-eligible employees one or more years before their retirement date vest upon retirement; these awards are accounted for as fully vested one year from the grant date.

Our 2017 Incentive Award Plan, a long-term incentive plan for employees and non-employee directors, allows us to grant stock-based compensation awards – including stock options, RSUs, PUs, MSUs and DSUs – or a combination of these and other awards. Under this plan, 5.4 million shares were made available for issuance, with each full value award counted as 1.5 shares for purposes of the number of shares authorized for issuance. Full value awards include RSUs, PUs and MSUs.

Stock-based compensation expense and the related recognized tax benefit were as follows:


(In millions)	2025		2024		2023
Stock-based compensation expense	$	27.9	$	28.7	$	22.3
Tax benefit	3.2		2.6		2.4

This expense was included in “Marketing, general and administrative expense” in the Consolidated Statements of Income.

As of December 31, 2025, we had approximately $40 million of unrecognized compensation expense related to unvested stock-based awards, which is expected to be recognized over the remaining weighted average requisite service period of approximately two years.

Stock Options

Stock options may be granted to employees and non-employee directors at no less than 100% of the fair market value of our common stock on the grant date and generally vest over a four-year period. Options expire ten years from the grant date.

The fair value of stock options is estimated as of the grant date using the Black-Scholes option-pricing model. This model requires input assumptions for our expected dividend yield, expected stock price volatility, risk-free interest rate and the expected option term.

No stock options were granted in fiscal years 2025 or 2024. The weighted average grant date fair value per share for stock options granted in 2023 was $47.65.

The following assumptions are used in estimating the fair value of granted stock options:

Risk-free interest rate is based on the 52-week average of the Treasury-Bond rate that has a term corresponding to the expected option term. For 2023, it was 3.84%.

Expected stock price volatility represents an average of the implied and historical volatility. For 2023, it was 23.90%.

Expected dividend yield is based on the current annual dividend divided by the 12-month average of our monthly stock price prior to grant. For 2023, it was 1.84%.

Expected option term is determined based on historical experience under our long-term incentive plans. For 2023, it was 6.31 years.

The following table summarizes information related to stock options:


	Number of options (in thousands)	Weighted average exercise price		Weighted average remaining contractual life (in years)	Aggregate intrinsic value (in millions)
Outstanding at December 28, 2024	63.0	$	190.54	8.68	$	—

Exercised	—	—
Outstanding at December 31, 2025	63.0	$	190.54	7.67	$	—
Options vested and expected to vest at December 31, 2025	58.5	190.54		7.67	—
Options exercisable at December 31, 2025	—	$	—		$	—

There were no stock option exercises in 2025 or 2023. The total intrinsic value of stock options exercised in 2024 was $19.5 million. We received approximately $10 million in 2024 from the exercise of stock options, and the tax benefit associated with these exercised options was $4.8 million. The intrinsic value of a stock option is based on the amount by which the market value of our stock exceeds the exercise price of the option.

Performance Units (“PUs”)

PUs are performance-based awards granted to eligible employees under our equity plan. PUs are payable in shares of our common stock at the end of a three- or four-year cliff vesting period provided that the designated performance objectives are achieved at the end of the period. Over the performance period, the estimated number of shares of our common stock issuable upon vesting is adjusted upward or downward based on the probability of achieving the performance objectives established for the award. The number of shares issued generally ranges from 0% to 200% of the target shares at the time of grant; however the shares issued for certain special PU awards can range up to 300% of the target shares at time of grant. The weighted average grant date fair value for PUs was $175.53, $224.82 and $180.12 in 2025, 2024 and 2023, respectively.

The following table summarizes information related to awarded PUs:


	Number of PUs (in thousands)	Weighted average grant-date fair value
Unvested at December 28, 2024	292.1	$	181.94
Granted at target	154.2	175.53
Adjustment for performance achievement(1)	(32.5)	162.57
Vested	(38.7)	164.91
Forfeited/cancelled	(16.9)	184.27
Unvested at December 31, 2025	358.2	$	182.66

(1) Reflects adjustments for performance for the 2022-2024 PUs.

The fair value of vested PUs was $6.4 million in 2025, $20.6 million in 2024 and $22.7 million in 2023.

Market-Leveraged Stock Units (“MSUs”)

MSUs are performance-based awards granted to eligible employees under our equity plan. MSUs are payable in shares of our common stock over a four-year period provided that the designated performance objective is achieved as of the end of each vesting period. MSUs accrue dividend equivalents during the vesting period, which are earned and paid only at vesting provided that, at a minimum, threshold-level performance is achieved. The number of shares earned is based upon our absolute total shareholder return at each vesting date and can range from 0% to 200% of the target amount of MSUs subject to vesting. Each of the four vesting periods represents one tranche of MSUs and the fair value of each of these four tranches was determined using the Monte-Carlo simulation model, which utilizes multiple input variables, including expected stock price volatility and other assumptions, to estimate the probability of achieving the performance objective established for the award. The weighted average grant date fair value for MSUs was $190.36, $259.75 and $192.53 in 2025, 2024 and 2023, respectively.

The following table summarizes information related to awarded MSUs:


	Number of MSUs (in thousands)	Weighted average grant- date fair value
Unvested at December 28, 2024	163.7	$	202.83
Granted at target	83.7	190.36
Adjustment for performance achievement(1)	.3	204.59
Vested	(67.5)	195.87
Forfeited/cancelled	(9.8)	196.20
Unvested at December 31, 2025	170.4	$	200.85

(1) Reflects adjustments for performance for the tranches of MSUs vesting in 2025.

The fair value of vested MSUs was $13.2 million in 2025, $14.6 million in 2024 and $16.1 million in 2023.

Restricted Stock Units (“RSUs”)

RSUs are service-based awards granted to eligible employees and non-employee directors under our equity plan. RSUs granted to employees generally vest over a period between one and four years. RSUs granted to non-employee directors generally vest in one year. The vesting of RSUs is subject to continued service through the applicable vesting date. If that condition is not met, unvested RSUs are generally forfeited. The weighted average grant date fair value for RSUs was $171.82, $210.74 and $175.88 in 2025, 2024 and 2023, respectively.

The following table summarizes information related to awarded RSUs:


	Number of RSUs (in thousands)	Weighted average grant-date fair value
Unvested at December 28, 2024	94.9	$	191.22
Granted	73.4	171.82
Vested	(64.7)	191.49
Forfeited/cancelled	(1.8)	184.65
Unvested at December 31, 2025	101.8	$	177.19

The fair value of vested RSUs was $12.4 million, $3.2 million and $2.7 million in 2025, 2024 and 2023, respectively.

Cash-Based Awards

Long-Term Incentive Units (“LTI Units”)

LTI Units are cash-based awards granted to eligible employees under our long-term incentive unit plan. LTI Units are service-based awards that generally vest ratably over a four-year period. The settlement value equals the number of vested LTI Units multiplied by the average of the high and low market prices of our common stock on the vesting date. The compensation expense related to these awards is amortized on a straight-line basis and the fair value is remeasured using the estimated percentage of units expected to be earned multiplied by the average of the high and low market prices of our common stock at each quarter-end.

We also grant cash-based awards in the form of performance and market-leveraged LTI Units to eligible employees. Performance LTI Units are payable in cash at the end of a three-year cliff vesting period provided that certain performance objectives are achieved at the end of the performance period. Market-leveraged LTI Units are payable in cash and vest ratably over a period of four years. The number of performance and market-leveraged LTI Units earned at vesting is adjusted upward or downward based upon the probability of achieving the performance objectives established for the respective award and the actual number of units issued can range from 0% to 200% of the designated target units subject to vesting. Performance and market-leveraged LTI Units are remeasured using the estimated percentage of units expected to be earned multiplied by the average of the high and low market prices of our common stock at each quarter-end over their respective performance periods. The compensation expense related to performance LTI Units is amortized on a straight-line basis over their respective performance periods. The compensation expense related to market-leveraged LTI Units is amortized on a graded-vesting basis over their respective performance periods.

The compensation expense related to LTI Units was $12.9 million in 2025, $14.9 million in 2024 and $16.3 million in 2023. This expense was included in “Marketing, general and administrative expense” in the Consolidated Statements of Income. The total recognized tax benefit related to LTI Units was $3.2 million in 2025, $3.6 million in 2024 and $3.9 million in 2023.

Avery Dennison Corp 10-K