NOTE 11 STOCK COMPENSATION

General

Prior to the Spin-off, our employees participated in Occidental’s stock-based incentive plans under which, if they were eligible, they received Occidental stock awards. Effective on the Spin-off date of November 30, 2014, our employees and non-employee directors began participating in our long-term incentive plan.

Our incentive plan authorizes the Compensation Committee of our Board of Directors to grant up to a total of 25 million shares in the form of stock options, stock appreciation rights, stock awards, performance awards and cash awards, among others, to our employees, non-employee directors and other plan participants. If approved at our 2016 Annual Meeting, the number of shares authorized for grant under our incentive plan will increase to 47 million.

In connection with the Spin-off, unvested share-based compensation awards granted to our employees under Occidental’s stock-based incentive plans and held by grantees as of November 30, 2014 were replaced with substitute awards based on CRC common shares. These substitute awards were intended to generally preserve the value of the original Occidental award determined as of November 30, 2014. Original and remaining vesting periods of Occidental awards were unaffected by the substitution. There were approximately 650 employees affected by the substitution of awards. The substitution of awards did not cause us to recognize incremental compensation expense. These substitute awards reduced the maximum number of shares of our common stock available for delivery under our incentive plan.

During 2015 and 2014, non-employee directors were granted restricted stock units (RSU) awards of approximately 153,750 shares and 74,600 shares of restricted stock, respectively, which fully vest and convert into shares one year from the date of grant. Compensation expense for these awards that will be recognized during the vesting period was measured using the quoted market price of our common stock on the grant date.

Compensation expense for stock-based awards for the year ended December 31, 2015 and the month ended December 31, 2014 was approximately $34 million and $1 million, respectively. Prior to the Spin-off, Occidental allocated certain costs to us which included compensation costs for stock-based awards of Occidental stock. Using the same allocation method for all allocated costs used by Occidental, we estimate the stock compensation expense allocated to us was approximately $26 million, and $33 million for January 1, 2014 through November 30, 2014, and total year 2013, respectively.

For the year ended December 31, 2015, we recognized income tax expense of approximately $2 million and made cash payments of $10 million for the cash-settled portion of our awards vested in 2015. As the stock compensation expenses prior to the Spin-off costs were allocated to us, it was not practical to calculate the tax expense/benefit or cash payments for those years.

As of December 31, 2015, unrecognized compensation expense for all our unvested stock-based incentive awards, based on the year-end value of our common stock, was $53 million. This expense is expected to be recognized over a weighted-average period of 1.94 years.

Restricted Stock Units

Certain employees are awarded RSUs which are in the form of, or equivalent in value to, actual shares of CRC common stock. Depending on their terms, RSUs are settled in cash or stock at the time of vesting. These awards vest ratably over three years, or at the end of two or three years, following the date of grant. For a substantial majority of the RSUs, declared dividend equivalents, if any, are paid during the vesting period.

The following summarizes our RSU activity for the year ended December 31, 2015:

	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	4,548	$	7.37	2,773	$	7.84
Granted	7,497	$	4.20	—	$	—
Vested	(1,883)	$	7.23	(1,176)	$	7.67
Forfeited	(1,122)	$	5.12	(276)	$	7.99

Unvested at December 31	9,040	$	5.05	1,321	$	7.94

Performance Stock Unit Awards

Certain executives are awarded Performance Stock Unit (PSU) awards that vest at the end of a three-year period following the grant date if performance targets are certified as being met. In August 2015, PSU awards were granted that have payouts ranging from 0 to 200 percent of the target award that would settle, once certified, fully in cash. The 2015 PSU awards will convert to stock-settled if approval for additional shares is granted under our long-term incentive plan at the 2016 Annual Meeting. Dividend equivalents, if any, declared during the vesting period are accumulated and paid upon certification, for the number of vested shares.

The performance targets under the 2015 PSU awards are based 50% on achievement of specified VCI results and 50% on TSR relative to a selected peer group of companies over specified multi-year performance periods.

The fair values of the VCI-based portions of the PSU awards are initially determined on the grant date based on an estimated performance achievement at the target level.

A summary of our unvested PSU awards as of December 31, 2015, and changes during the year ended December 31, 2015, is presented below:

	Cash-Settled			Stock-Settled
	PSUs (000’s)	Weighted- Average Grant Date Fair Value		PSUs (000’s)	Weighted- Average Grant- Date Fair Value
Unvested at January 1	—	$	—	3,890	$	7.65
Granted	2,864	$	4.20	—	$	—
Vested	—	$	—	(670)	$	7.03
Forfeited	(78)	$	4.20	—	$	—

Unvested at December 31	2,786	$	4.20	3,220	$	7.78

The grant date and December 31, 2015 assumptions used in the Monte Carlo valuation for the TSR-based portion of the PSU awards granted during 2015 were as follows:

	December 31, 2015		Grant Date
Risk-free interest rate	1.18%		1.06%
Dividend yield	—		0.95%
Volatility factor	50.50%		43.63%
Expected life (years)	2.5		2.9
Fair value of underlying CRC stock	$	2.33	$	4.20

Stock Options

We granted stock options to certain executives under our long-term incentive plan. The options permit purchase of our common stock at exercise prices no less than the fair market value of the stock on the date the options were granted. The options have terms of seven years and vest ratably, with one-third vesting and becoming exercisable on each anniversary date following the date of grant.

The following table summarizes our option activity during the year ended December 31, 2015:

	Options (000’s)	Weighted- Average Exercise Price		Weighted- Average Grant-Date Fair Value		Aggregate Intrinsic Value
Beginning balance, January 1	8,481	$	8.11	$	1.98	$	—
Granted	3,208	$	4.20	$	1.50	$	—
Exercised	—	$	—	$	—	$	—
Forfeited	(174)	$	8.11	$	1.98	$	—
Expired or Canceled	—	$	—	$	—	$	—

Ending balance, December 31	11,515	$	7.02	$	1.85	$	—

Exercisable at December 31	2,918	$	7.98	$	1.96	$	—

The grant date assumptions used in the Black-Scholes valuation for options granted during 2015 and 2014 were as follows:

	2015		2014
Exercise price per share	$	4.20	$	8.11
Expected life (in years)	4.5		4.5
Expected volatility	44.7%		35.4%
Risk-free interest rate	1.56%		1.40%
Dividend yield	0.95%		0.50%
Grant date fair value of stock option awards granted	$	1.50	$	1.98

Employee Stock Purchase Plan

Effective January 1, 2015, we adopted the California Resources Corporation 2014 Employee Stock Purchase Plan (ESPP). The ESPP provides our employees the ability to purchase shares of our common stock at a price equal to 85% of the closing price of a share of our common stock as of the first or last day of each offering period (a fiscal quarter), whichever amount is less.

The maximum number of shares of our common stock which may be issued pursuant to the ESPP is subject to certain annual limits and has a cumulative limit of 5 million shares, subject to adjustment pursuant to the terms of the ESPP. If approved at our 2016 Annual Meeting, the number of shares authorized for issuance under our ESPP will increase to 10 million. For the year ended December 31, 2015, we issued approximately 2.1 million shares of common stock in connection with the ESPP. As of January 1, 2016, over 50% of our employees had elected to participate in the plan.