SHARE-BASED COMPENSATION PLANS AND AWARDS

2012 Omnibus Stock Compensation Plan

Eastman's 2012 Omnibus Stock Compensation Plan ("2012 Omnibus Plan") was approved by stockholders at the May 3, 2012 Annual Meeting of Stockholders and shall remain in effect until its fifth anniversary. The 2012 Omnibus Plan authorizes the Compensation and Management Development Committee of the Board of Directors to: grant awards, designate participants, determine the types and numbers of awards, determine the terms and conditions of awards and determine the form of award settlement. Under the 2012 Omnibus Plan, the aggregate number of shares reserved and available for issuance is 10 million, which consist of shares not previously authorized for issuance under any other plan. The number of shares covered by an award is counted against this share reserve as of the grant date of the award. Shares covered by full value awards (e.g. performance shares and restricted stock awards) are counted against the total number of shares available for issuance or delivery under the plan as 2.5 shares for every one share covered by the award. Any stock distributed pursuant to an award may consist of, in whole or in part, authorized and unissued stock, treasury stock, or stock purchased on the open market. Under the 2012 Omnibus Plan and previous plans, the forms of awards have included: restricted stock and restricted stock units, stock options, stock appreciation rights ("SARs"), and performance shares. The 2012 Omnibus Plan is flexible as to the number of specific forms of awards, but provides that stock options and SARs are to be granted at an exercise price not less than 100 percent of the per share fair market value on the date of the grant.

Director Stock Compensation Subplan

Eastman's 2015 Director Stock Compensation Subplan ("Directors' Subplan"), a component of the 2012 Omnibus Plan, remains in effect until terminated by the Board of Directors or the earlier termination of the 2012 Omnibus Plan. The Directors' Subplan provides for structured awards of restricted shares to non-employee members of the Board of Directors. Restricted shares awarded under the Directors' Subplan are subject to the same terms and conditions of the 2012 Omnibus Plan. The Directors' Subplan does not constitute a separate source of shares for grant of equity awards and all shares awarded are part of the 10 million shares authorized under the 2012 Omnibus Plan. Shares of restricted stock are granted on the first day of a non-employee director's initial term of service and shares of restricted stock are granted each year to each non-employee director on the date of the annual meeting of stockholders.

General

The Company is authorized by the Board of Directors under the 2012 Omnibus Plan to provide grants to employees and non-employee members of the Board of Directors. It has been the Company's practice to issue new shares rather than treasury shares for equity awards that require settlement by the issuance of common stock and to withhold or accept back shares awarded to cover the related income tax obligations of employee participants. Shares of unrestricted common stock owned by non-employee directors are not eligible to be withheld or acquired to satisfy the withholding obligation related to their income taxes. Shares of unrestricted common stock owned by specified senior management level employees are accepted by the Company to pay the exercise price of stock options in accordance with the terms and conditions of their awards.

For 2015, 2014, and 2013, total share-based compensation expense (before tax) of approximately $36 million, $28 million, and $40 million, respectively, was recognized in selling, general and administrative expense in the Consolidated Statements of Earnings for all share-based awards of which approximately $7 million, $4 million, and $5 million, respectively, related to stock options. The compensation expense is recognized over the substantive vesting period, which may be a shorter time period than the stated vesting period for qualifying termination eligible employees as defined in the forms of award notice. For 2015, 2014, and 2013, approximately $2 million, $1 million, and $3 million, respectively, of stock option compensation expense was recognized due to qualifying termination eligibility preceding the requisite vesting period.

Stock Option Awards

Options have been granted on an annual basis to non-employee directors under the Directors' Subplan and predecessor plans and by the Compensation and Management Development Committee of the Board of Directors under the 2012 Omnibus Plan and predecessor plans to employees. Option awards have an exercise price equal to the closing price of the Company's stock on the date of grant. The term of options is 10 years with vesting periods that vary up to three years. Vesting usually occurs ratably over the vesting period or at the end of the vesting period. The Company utilizes the Black Scholes Merton option valuation model which relies on certain assumptions to estimate an option's fair value.

The weighted average assumptions used in the determination of fair value for stock options awarded in 2015, 2014, and 2013 are provided in the table below.



Assumptions	2015	2014	2013
Expected volatility rate	24.11%	25.82%	34.90%
Expected dividend yield	1.75%	1.70%	1.97%
Average risk-free interest rate	1.45%	1.44%	0.77%
Expected forfeiture rate	0.75%	0.75%	0.75%
Expected term years	4.8	4.7	5.0

The volatility rate of grants is derived from historical Company common stock price volatility over the same time period as the expected term of each stock option award. The volatility rate is derived by mathematical formula utilizing the weekly high closing stock price data over the expected term.

The expected dividend yield is calculated using the Company's average of the last four quarterly dividend yields.

The average risk-free interest rate is derived from United States Department of Treasury published interest rates of daily yield curves for the same time period as the expected term.

GAAP specifies only share-based awards expected to vest be included in share-based compensation expense. Estimated forfeiture rates are determined using historical forfeiture experience for each type of award and are excluded from the quantity of awards included in share-based compensation expense.

The weighted average expected term reflects the analysis of historical share-based award transactions and includes option swap and reload grants which may have much shorter remaining expected terms than new option grants.

A summary of the activity of the Company's stock option awards for 2015, 2014, and 2013 is presented below:



	2015				2014				2013
	Options		Weighted-Average Exercise Price		Options		Weighted-Average Exercise Price		Options		Weighted-Average Exercise Price
Outstanding at beginning of year	2,209,800		$	46	2,359,100		$	39	2,480,100		$	33
Granted	512,700		74		272,100		86		317,900		70
Exercised	(271,200	)	30		(419,300	)	31		(436,500	)	28
Cancelled, forfeited, or expired	(16,700	)	77		(2,100	)	55		(2,400	)	15
Outstanding at end of year	2,434,600		$	53	2,209,800		$	46	2,359,100		$	39
Options exercisable at year-end	1,643,100				1,726,800				1,862,000
Available for grant at end of year	5,413,250				7,271,093				8,454,854

The following table provides the remaining contractual term and weighted average exercise prices of stock options outstanding and exercisable at December 31, 2015:



	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number Outstanding at December 31, 2015	Weighted-Average Remaining Contractual Life (Years)	Weighted-Average Exercise Price		Number Exercisable at December 31, 2015	Weighted-Average Exercise Price
$18-$29	272,100	3.7	$	27	272,100	$	27
$30-$34	211,700	1.2	32		211,700	32
$35-$40	868,000	5.3	39		868,000	39
$41-$87	1,082,800	8.4	76		291,300	74
	2,434,600	6.1	$	53	1,643,100	$	42

The range of exercise prices of options outstanding at December 31, 2015 is approximately $18 to $87 per share. The aggregate intrinsic value of both total options outstanding and total options exercisable at December 31, 2015 is $43 million. Intrinsic value is the amount by which the closing market price of the stock at December 31, 2015 exceeds the exercise price of the option grants.

The weighted average remaining contractual life of all exercisable options at December 31, 2015 is 4.9 years.

The weighted average fair value of options granted during 2015, 2014, and 2013 was $13.89, $17.12, and $17.92, respectively. The total intrinsic value of options exercised during the years ended December 31, 2015, 2014, and 2013, was $13 million, $22 million, and $21 million, respectively. Cash proceeds received by the Company from option exercises and the related tax benefit totaled $8 million and $4 million, respectively, for 2015, $13 million and $7 million, respectively, for 2014, and $12 million and $6 million, respectively, for 2013. The total fair value of shares vested during the years ended December 31, 2015, 2014, and 2013 was $3 million, $4 million, and $3 million, respectively.

A summary of the status of the Company's nonvested options as of December 31, 2015 and changes during the year then ended is presented below:



Nonvested Options	Number of Options	Weighted-Average Grant Date Fair Value
Nonvested at January 1, 2015	483,000	$17.47
Granted	512,700	13.89
Vested	(187,400)	17.66
Forfeited	(16,800)	14.55
Nonvested options at December 31, 2015	791,500	$15.17

For nonvested options at December 31, 2015, approximately $3 million in compensation expense will be recognized over the next three years.

Other Share-Based Compensation Awards

In addition to stock option awards, the Company has awarded long-term performance share awards, restricted stock awards, and SARs. The long-term performance share awards are based upon actual return on capital compared to a target return on capital and total stockholder return compared to a peer group ranking by total stockholder return over a three year performance period. The awards are valued using a Monte Carlo Simulation based model and vest pro-rata over the three year performance period. The number of long-term performance award target shares granted for the 2015-2017, 2014-2016, and 2013-2015 periods were 347 thousand, 285 thousand, and 270 thousand, respectively. The target shares granted are assumed to be 100 percent. At the end of the three-year performance period, the actual number of shares awarded can range from zero percent to 250 percent of the target shares granted based on the award notice. The number of restricted stock awards granted during 2015, 2014, and 2013 were 233 thousand, 144 thousand, and 146 thousand, respectively. The fair value of a restricted stock award is equal to the closing stock price of the Company's stock on the date of grant and normally vests over a period of three years. The recognized compensation expense before tax for these other share-based awards in the years ended December 31, 2015, 2014, and 2013 was approximately $29 million, $24 million, and $35 million, respectively. The unrecognized compensation expense before tax for these same type awards at December 31, 2015 was approximately $40 million and will be recognized primarily over a period of two years.