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STOCK-BASED INCENTIVE PLANS | 12 Months Ended
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Dec. 31, 2016
STOCK-BASED INCENTIVE PLANS |
STOCK-BASED INCENTIVE PLANS |
NOTE 12 | STOCK-BASED INCENTIVE PLANS
Occidental has established several plans that allow it to issue stock-based awards including in the form of RSUs, stock options (Options), stock appreciation rights (SARs), ROCEI/ROAI and TSRIs. An aggregate of 35 million shares of Occidental common stock were authorized for issuance and approximately 4.5 million shares had been allocated to employee awards through December 31, 2016. In accordance with the terms of the shareholder approved 2015 Long-Term Incentive Plan (LTIP), awards issued under the superseded 2005 LTIP and subsequently forfeited after adoption of the 2015 LTIP increase the shares available for issuance under the 2015 LTIP. As of December 31, 2016, approximately 30 million shares were available for grants of future awards. The plan requires each share covered by an award (other than Options and SARs) to be counted as if three shares were issued in determining the number of shares that are available for future awards. Accordingly, the number of shares available for future awards may be less than 30 million depending on the type of award granted. Additionally, under the plan, the shares available for future awards may increase, depending on the award type, by the number of shares currently unvested or forfeitable, or three times that number as applicable, that (i) fail to vest, (ii) are forfeited or canceled, or (iii) correspond to the portion of any stock-based awards settled in cash, including awards that were issued under a previous plan that remain outstanding. During 2016, non-employee directors were granted awards for 23,888 shares of common stock. Compensation expense for these awards was measured using the closing quoted market price of Occidental's common stock on the grant date and was fully recognized at that time. The following table summarizes total share-based compensation expense recognized in income related to continuing and discontinued operations and the associated tax benefit for the years ended December 31:
For the years ended December 31, (in millions) |  | 2016 |  | 2015 |  | 2014
Compensation expense |  | $ | 121 |  |  | $ | 49 |  |  | $ | 129 |
Income tax benefit recognized in the income statement |  | 43 |  |  | 17 |  |  | 46 |
As of December 31, 2016, unrecognized compensation expense for all unvested stock-based incentive awards was $231 million. This expense is expected to be recognized over a weighted-average period of 2.2 years. RSUs Certain employees are awarded the right to receive RSUs, some of which have performance criteria based on net income or earnings per share, and are in the form of, or equivalent in value to, actual shares of Occidental common stock. Depending on their terms, RSUs are settled in cash or stock at the time of vesting. These awards vest from one to four years following the grant date, however, certain of the RSUs are forfeitable if performance objectives are not satisfied by the seventh anniversary of the grant date. For certain RSUs, dividend equivalents are paid during the vesting period. For those awards that cliff vest between one to three years, dividend equivalents are accumulated during the vesting or performance period, as appropriate, and are paid upon vesting or performance certification, as appropriate. The weighted-average, grant-date fair values of cash-settled RSUs granted in 2016, 2015 and 2014 were $75.57, $72.64, and $100.95 per share, respectively. The weighted-average, grant-date fair values of the stock-settled RSUs granted in 2016, 2015, and 2014 were $74.82, $72.54, and $101.77, respectively. Cash-Settled RSUs resulted in payments of $41 million, $39 million, and $64 million during the years ended December 31, 2016, 2015, and 2014, respectively. The fair value of RSUs settled in shares during the years ended December 31, 2016, 2015, and 2014 was $31 million, $28 million, and $56 million, respectively. A summary of changes in Occidental’s unvested cash- and stock-settled RSUs during the year ended December 31, 2016 is presented below:
|  | Cash-Settled |  | Stock-Settled
|  | RSUs (000's) |  | Weighted-Average Grant-Date Fair Value |  | RSUs (000's) |  | Weighted-Average Grant-Date Fair Value
Unvested at January 1 |  | 1,130 |  |  |  | $ | 81.06 |  |  |  | 1,758 |  |  |  | $ | 81.19 |  |
Granted |  | 53 |  |  |  | 75.57 |  |  |  | 2,238 |  |  |  | 74.82 |  |
Vested |  | (536 | ) |  |  | 83.18 |  |  |  | (417 | ) |  |  | 82.35 |  |
Forfeitures |  | (46 | ) |  |  | 80.89 |  |  |  | (79 | ) |  |  | 77.00 |  |
Unvested at December 31 |  | 601 |  |  |  | 78.70 |  |  |  | 3,500 |  |  |  | 77.07 |  |
TSRIs Certain executives are awarded TSRIs that vest at the end of a three-year period following the grant date. Payout is based upon Occidental's total shareholder return performance relative to its peers and the S&P 500. TSRIs granted in 2016 and 2015 have payouts that range from 0 to 200 percent of the target award. TSRIs granted in July 2014 have payouts that range from 0 to 150 percent of the target award; all outstanding TSRIs settle fully in stock once certified. Dividend equivalents for TSRIs are accumulated and paid upon certification of the award. The fair value of TSRIs settled in shares during the years ended December 31, 2016, 2015, and 2014 was $8 million, $14 million, and zero, respectively. The fair values of TSRIs are initially determined on the grant date using a Monte Carlo simulation model based on Occidental's assumptions, noted in the following table, and the volatility from corresponding peer group companies. The expected life is based on the vesting period (Term). The risk-free interest rate is the implied yield available on zero coupon T-notes (US Treasury Strip) at the time of grant with a remaining term equal to the Term. The dividend yield is the expected annual dividend yield over the Term, expressed as a percentage of the stock price on the grant date. Estimates of fair value may not accurately predict the value ultimately realized by the employees who receive the awards, and the ultimate value may not be indicative of the reasonableness of the original estimates of fair value made by Occidental. The grant-date assumptions used in the Monte Carlo simulation models for the estimated payout level of TSRIs were as follows:
|  | TSRIs
Year Granted |  | 2016 |  | 2015 |  | 2014
Assumptions used: |  |  |  |  |  |
Risk-free interest rate |  | 0.8 | % |  | 0.9 | % |  | 1.0 | %
Dividend yield |  | 3.9 | % |  | 4.1 | % |  | 2.8 | %
Volatility factor |  | 42 | % |  | 37 | % |  | 27 | %
Expected life (years) |  | 3 |  |  | 3 |  |  | 3 |
Grant-date fair value of underlying Occidental common stock |  | $ | 76.83 |  |  | $ | 72.54 |  |  | $ | 101.95 |
A summary of Occidental’s unvested TSRIs as of December 31, 2016, and changes during the year ended December 31, 2016, is presented below:
|  | TSRIs
|  | Awards (000’s) |  | Weighted-Average Grant-Date Fair Value of Occidental Stock
Unvested at January 1 (a) |  | 346 |  |  |  | $ | 83.75 |  |
Granted (a) |  | 473 |  |  |  | 76.83 |  |
Vested (a) |  | (102 | ) |  |  | 87.27 |  |
Forfeitures |  | (10 | ) |  |  | 76.43 |  |
Unvested at December 31 |  | 707 |  |  |  | 78.72 |  |
(a) Presented at the target payouts. STOCK OPTIONS AND SARs Certain employees have been granted Stock Appreciation Rights (SAR) or Options that are settled in stock. Exercise prices of the Options were equal to the quoted market value of Occidental’s stock on the grant date. No options were granted in 2016. The intrinsic value of options and stock-settled SARs exercised during the years ended December 31, 2016, 2015, and 2014 was $1 million, zero, and $5 million, respectively. In 2014, cash payments of $26 million were made for cash - settled SAR awards granted in 2004. In 2015 and 2016 no cash based SAR awards were granted or outstanding. The fair value of each Option or stock-settled SAR is initially measured on the grant date using the Black Scholes option valuation model. The expected life is estimated based on the vesting and expiration terms of the award. The volatility factors are based on the historical volatilities of Occidental common stock over the expected lives as estimated on the grant date. The risk-free interest rate is the implied yield available on US Treasury Strips at the grant date with a remaining term equal to the expected life of the measured instrument. The dividend yield is the expected annual dividend yield over the expected life, expressed as a percentage of the stock price on the grant date. Estimates of fair value may not accurately predict the value ultimately realized by employees who receive stock-based incentive awards, and the ultimate value may not be indicative of the reasonableness of the original estimates of fair value made by Occidental. The following is a summary of Option and SAR transactions during the year ended December 31, 2016:
|  | SARs & Options (000's) |  | Weighted-Average Exercise Price |  | Weighted-Average Remaining Contractual Term (yrs) |  | Aggregate Intrinsic Value (000’s)
Beginning balance, January 1 |  | 629 |  |  | $ | 77.58 |  |  |  |  |
Exercised |  | (47 | ) |  | 45.53 |  |  |  |  |
Granted |  | — |  |  | — |  |  |  |  |
Forfeited |  | (11 | ) |  | 79.98 |  |  |  |  |
Ending balance, December 31 |  | 571 |  |  | 79.98 |  |  | 5.1 |  |  | $ | — |
Exercisable at December 31 |  | 214 |  |  | 79.98 |  |  | 5.1 |  |  | $ | — |
ROCEI / ROAI Occidental grants share-equivalents to certain employees that vest at the end of a three-year period if performance targets based on return on assets of the applicable segment or return on capital employed are certified as being met. These awards are settled in stock upon certification of the performance target, with payouts that range from 0 to 200 percent of the target award. Dividend equivalents are accumulated and paid upon certification of the award.
|  | ROCEI / ROAI
|  | Awards (000's) |  | Weighted-Average Grant-Date Fair Value of Occidental Stock
Unvested at January 1 |  | 392 |  |  |  | $ | 85.43 |  |
Unvested at December 31 |  | 392 |  |  |  | 85.43 |  |

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