Share-based Compensation and Incentive Plans

Stock Plans

In 2015, 2014 and 2013 share-based compensation awards were granted to employees under KBR share-based compensation plans.

KBR Stock and Incentive Plan (Amended May 2012)

In November 2006, KBR established the KBR Stock and Incentive Plan ("KBR Stock Plan"), which provides for the grant of any or all of the following types of share-based compensation listed below:


•	stock options, including incentive stock options and nonqualified stock options;


•	stock appreciation rights, in tandem with stock options or freestanding;


•	restricted stock;


•	restricted stock units;


•	cash performance awards; and


•	stock value equivalent awards.

In May 2012, the KBR Stock Plan was amended to add 2 million shares of our common stock available for issuance under the KBR Stock Plan. Additionally, this amendment increased the sublimit under the Stock Plan in the form of restricted stock awards, restricted stock unit awards or pursuant to performance awards by 2 million. Under the terms of the KBR Stock Plan, 12 million shares of common stock have been reserved for issuance to employees and non-employee directors. The plan specifies that no more than 5.5 million shares can be awarded as restricted stock or restricted stock units or pursuant to cash performance awards. At December 31, 2015, approximately 2.3 million shares were available for future grants under the KBR Stock Plan, of which approximately 0.7 million shares remained available for restricted stock awards or restricted stock unit awards.

KBR Stock Options

Under the KBR Stock Plan, stock options are granted with an exercise price not less than the fair market value of the common stock on the date of the grant and a term no greater than 10 years. The term and vesting periods are established at the discretion of the Compensation Committee at the time of each grant. We amortize the fair value of the stock options over the vesting period on a straight-line basis. Options are granted from shares authorized by our Board of Directors.

Total number of stock options granted and the assumptions used to determine the fair value of granted options were as follows:



	Years ended December 31,
KBR stock options assumptions summary	2015		2014
Granted stock options (shares in millions)	1.1		0.6
Weighted average expected term (in years)	5.5		5.5
Weighted average grant-date fair value per share	$	4.91	$	9.57



	Years ended December 31,
KBR stock options range assumptions summary	2015				2014
	Range				Range
	Start		End		Start		End
Expected volatility range	33.92	%	39.65	%	36.48	%	40.49	%
Expected dividend yield range	1.15	%	2.13	%	1.08	%	1.52	%
Risk-free interest rate range	1.46	%	2.12	%	1.67	%	2.21	%

For KBR stock options granted in 2015, 2014 and 2013, the fair value of options at the date of grant was estimated using the Black-Scholes-Merton option pricing model. The expected volatility of KBR options granted in each year is based upon a blended rate that uses the historical and implied volatility of common stock for KBR and selected peers. Effective in 2014, the expected term of KBR options granted was based on KBR's historical experience. The expected term of KBR options granted in 2013 was based on the average of the life of the option and the vesting period of the option. The estimated dividend yield is based upon KBR’s annualized dividend rate divided by the market price of KBR’s stock on the option grant date. The risk-free interest rate is based upon the yield of U.S. government issued treasury bills or notes on the option grant date.

The following table presents stock options granted, exercised, forfeited and expired under KBR share-based compensation plans for the year ended December 31, 2015.



KBR stock options activity summary	Number of Shares		Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term (years)	Aggregate Intrinsic Value (in millions)
Outstanding at December 31, 2014	3,160,091		$	26.96	6.54	$	2.40
Granted	1,067,308		16.52
Exercised	(62,503	)	12.32
Forfeited	(231,949	)	23.65
Expired	(450,290	)	30.19
Outstanding at December 31, 2015	3,482,657		$	23.83	6.55	$	2.92
Exercisable at December 31, 2015	2,059,060		$	26.18	5.02	$	2.00

The total intrinsic values of options exercised for the years ended December 31, 2015, 2014 and 2013 were $0.3 million, $3 million and $7 million, respectively. As of December 31, 2015, there was $5 million of unrecognized compensation cost, net of estimated forfeitures, related to non-vested KBR stock options, expected to be recognized over a weighted average period of approximately 1.75 years. Stock option compensation expense was $5 million in 2015, $6 million in 2014 and $9 million in 2013. Total income tax benefit recognized in net income for share-based compensation arrangements was $2 million in 2015 and 2014 and $3 million in 2013.

KBR Restricted stock

Restricted shares issued under the KBR Stock Plan are restricted as to sale or disposition. These restrictions lapse periodically over a period of time not exceeding 10 years. Restrictions may also lapse for early retirement and other conditions in accordance with our established policies. Upon termination of employment, shares on which restrictions have not lapsed must be returned to us, resulting in restricted stock forfeitures. The fair market value of the stock on the date of grant is amortized and ratably charged to income over the period during which the restrictions lapse on a straight-line basis. For awards with performance conditions, an evaluation is made each quarter as to the likelihood of meeting the performance criteria. Share-based compensation is then adjusted to reflect the number of shares expected to vest and the cumulative vesting period met to date.

The following table presents the restricted stock awards and restricted stock units granted, vested and forfeited during 2015 under the KBR Stock Plan.



Restricted stock activity summary	Number of Shares		Weighted Average Grant-Date Fair Value per Share
Nonvested shares at December 31, 2014	1,128,877		$	28.99
Granted	855,499		16.66
Vested	(529,440	)	25.97
Forfeited	(80,970	)	19.05
Nonvested shares at December 31, 2015	1,373,966		$	23.05

The weighted average grant-date fair value per share of restricted KBR shares granted to employees during 2015, 2014 and 2013 was $16.66, $28.46 and $30.64, respectively. Restricted stock compensation expense was $13 million for 2015, $16 million for 2014 and $7 million for 2013. Total income tax benefit recognized in net income for share-based compensation arrangements during 2015, 2014 and 2013 was $5 million, $6 million, and $3 million, respectively. As of December 31, 2015, there was $18 million of unrecognized compensation cost, net of estimated forfeitures, related to KBR’s non-vested restricted stock and restricted stock units, which is expected to be recognized over a weighted average period of 1.82 years. The total fair value of shares vested was $9 million in 2015, $6 million in 2014 and $8 million in 2013 based on the weighted-average fair value on the vesting date. The total fair value of shares vested was $14 million in 2015, $11 million in 2014 and $7 million in 2013 based on the weighted-average fair value on the date of grant.

Share-based compensation expense

The grant-date fair value of employee share options is estimated using option-pricing models. If an award is modified after the grant date, incremental compensation cost is recognized immediately as of the modification. Share-based compensation expense consists of $9 million recorded to cost of services, while the remaining $9 million is recorded to general and administrative expenses on our consolidated statements of operations. The benefits of tax deductions in excess of the compensation cost recognized for the options (excess tax benefits) are classified as additional paid-in-capital, and cash retained as a result of these excess tax benefits is presented in the statements of cash flows as financing cash inflows.



Share-based compensation summary table	Years ended December 31,
Dollars in millions	2015		2014		2013
Share-based compensation	$	18	$	22	$	16
Income tax benefit recognized in net income for share-based compensation	$	7	$	8	$	6
Incremental compensation cost	$	2	$	2	$	1

Incremental compensation cost resulted from modifications of previously granted share-based awards which allowed certain employees to retain their awards after leaving the company. Excess tax benefits realized from the exercise of share-based compensation awards are recognized as paid-in capital in excess of par.

KBR Cash Performance Based Award Units ("Cash Performance Awards")

Under the KBR Stock Plan, for Cash Performance Awards granted in the year 2015, performance is based 50% on average Total Shareholder Return ("TSR"), as compared to the average TSR of KBR’s peers, and 50% on KBR’s Job Income Sold ("JIS"). For Cash Performance Awards granted in 2014 and 2013, performance is based 100% on average TSR as compared to the average TSR of KBR’s peers. In accordance with the provisions of ASC 718 - Compensation-Stock Compensation, the TSR portion for the performance award units are classified as liability awards and remeasured at the end of each reporting period at fair value until settlement. The fair value approach uses the Monte Carlo valuation method which analyzes the companies comprising KBR’s peer group, considering volatility, interest rate, stock beta and TSR through the grant date. The JIS calculation is based on the Company's JIS earned at a target level averaged over a three year period. The JIS portion of the Cash Performance Award is also classified as a liability award and remeasured at the end of each reporting period based on our estimate of the amount to be paid at the end of the vesting period. The cash performance award units may only be paid in cash.

Under the KBR Stock Plan, in 2015, we granted 22 million performance based award units ("Cash Performance Awards") with a three-year performance period from January 1, 2015 to December 31, 2017. In 2014, we granted 27 million Cash Performance Awards with a three-year performance period from January 1, 2014 to December 31, 2016. In 2013, we granted 30 million Cash Performance Awards with a three-year performance period from January 1, 2013 to December 31, 2015. Cash Performance Awards forfeited, net of previous plan payout, totaled 15 million, 17 million, and 10 million at December 31, 2015, 2014 and 2013, respectively. At December 31, 2015, the outstanding balance for Cash Performance Awards is 70.8 million units. Cash Performance Awards are not considered earned until required performance conditions are met. Additionally, approval by the Compensation Committee of the Board of Directors is required before earned Cash Performance Awards are paid.

Cost for the Cash Performance Awards is accrued over the requisite service period. For the years ended December 31, 2015, 2014 and 2013, we recognized $3 million, $0 million and $8 million, respectively, in expense for the Cash Performance Awards. The expense associated with these Cash Performance Awards is included in cost of services and general and administrative expense in our consolidated statements of operations. The liability for awards included in "employee compensation and benefits" on our consolidated balance sheets was $5 million at December 31, 2015, of which none will become due within one year and $1 million at December 31, 2014.

KBR Employee Stock Purchase Plan (“ESPP”)

Under the ESPP, eligible employees may withhold up to 10% of their earnings, subject to some limitations, to purchase shares of KBR’s common stock. Unless KBR’s Board of Directors determine otherwise, each six-month offering period commences at the beginning of February and August of each year. Employees who participate in the ESPP will receive a 5% discount on the stock price at the end of each period. During 2015 and 2014, our employees purchased approximately 204,000 and 159,000 shares, respectively, through the ESPP. These shares were issued from our treasury share account.