Note 21 — Employee Compensation and Benefit Plans

We maintain defined contribution plans to provide post-retirement benefits to our eligible employees and non-contributory defined benefit pension plans which are frozen and cover certain former eligible employees. We also maintain additional incentive compensation plans for certain employees. We designed these plans to facilitate a pay-for-performance culture, further align the interests of our officers and key employees with the interests of our shareholders and to assist in attracting and retaining employees vital to our long-term success. These plans are summarized below.

Defined Contribution Savings Plans

We maintain defined contribution savings plans for employees in the U.S (401(k) plans) and India (Provident Fund). We sponsor separate defined contribution plans for Ocwen, PHH Corporation and PHH Home Loans that provide certain eligible employees an opportunity to accumulate funds for retirement. Contributions of participating employees are matched on the basis specified by these plans. The employee match percentage ranges from 50% of each employee’s contributions, limited to 2%, to 100% of each eligible participant’s salary deferred up to 4% of such participant’s eligible compensation per pay period with maximum aggregate matching of $10,800 for 2018. For the Provident Fund, both the employee and the employer are required to make minimum contributions to the fund at a predetermined rate (currently 12%) applied to a portion of the employee's salary. Employers are not required to make contributions beyond this minimum.

Our contributions to these plans were $4.8 million, $5.3 million and $4.9 million for the years ended December 31, 2018, 2017 and 2016, respectively.

Defined Benefit Pension Plans

Ocwen and PHH sponsor non-contributory defined benefit pension plan for which benefits are based on an employee’s years of credited service and a percentage of final average compensation, or as otherwise described by the plan. Both defined benefit pension plans are frozen, wherein the plans only accrue additional benefits for a limited number of employees and no additional employees are eligible for participation in the plans. On October 4, 2018, Ocwen assumed all benefit obligations associated with PHH’s defined benefit pension plan as a result of its completed acquisition of PHH.

The following table shows the total change in the benefit obligation, plan assets and funded status for the pension plans:



	December 31, 2018
Benefit obligation	$	49,122
Fair value of plan assets	36,439
Unfunded status recognized in Other liabilities	$	(12,683	)

Amounts recognized in Accumulated other comprehensive income	$	3,422

The net periodic benefit cost related to the defined benefit pension plans is $0.4 million for the year ended December 31, 2018 and not significant for the years ended December 31, 2017 and 2016, respectively and is included in Other expenses.

As of December 31, 2018, future expected benefit payments to be made from the defined benefit pension plan’s assets, which reflect expected future service, is $2.7 million for the year ending December 31, 2019, $2.8 million for the years ending December 31, 2020 through 2021 and $2.7 million for the years ending December 31, 2022 through 2023. The expected benefit payments to be made for the subsequent five years ending December 31, 2024 through 2028 are $15.4 million.

Both Ocwen and PHH’s policy is to contribute amounts to the defined benefit pension plans sufficient to meet minimum funding requirements as set forth in employee benefit and tax laws and additional amounts at their discretion. Our contributions to the Ocwen plan were $0.2 million, $0.1 million and $0.1 million for the years ended December 31, 2018, 2017 and 2016, respectively. No contributions were required to be made to the PHH plan during the post-acquisition period ended December 31, 2018, and contributions are not expected to be significant for the year ended December 31, 2019.

Annual Incentive Plan

The Ocwen Financial Corporation Amended 1998 Annual Incentive Plan and the 2017 Performance Incentive Plan (the 2017 Equity Plan) are our primary incentive compensation plans for executives and other eligible employees. Previously issued equity awards remain outstanding under the 2007 Equity Incentive Plan (the 2007 Equity Plan). Under the terms of these plans, participants can earn cash and equity-based awards as determined by the Compensation Committee of the Board of Directors (the Committee). The awards are based on objective and subjective performance criteria established by the Committee. The Committee may at its discretion adjust performance measurements to reflect significant unforeseen events. We recognized $20.5 million, $24.5 million and $25.5 million of compensation expense during 2018, 2017 and 2016, respectively, related to annual incentive compensation awarded in cash.

The 2007 Equity Plan and the 2017 Equity Plan authorize the grant of stock options, restricted stock, stock units or other equity-based awards to employees. Effective with the approval of the 2017 Equity Plan by Ocwen shareholders on May 24, 2017, no new awards will be granted under the 2007 Equity Plan. The number of remaining shares available for award grants under the 2007 Equity Plan became available for award grants under the 2017 Equity Plan effective upon shareholder approval. At December 31, 2018, there were 7,917,804 shares of common stock remaining available for future issuance under these plans.

Awards under these plans had the following characteristics in common:



Type of Award	Percent of Total Equity Award		Vesting Period
2008 - 2014 Awards:
Options:
Service Condition:
Time-based	25	%	Ratably over four years (25% on each of the four anniversaries of the grant date)
Market Condition:
Market performance-based	50		Over three years beginning with 25% vesting on the date that the stock price has at least doubled over the exercise price and the compounded annual gain over the exercise price is at least 20% and then ratably over three years (25% on each of the next three anniversaries of the achievement of the market condition)
Extraordinary market performance-based	25		Over three years beginning with 25% vesting on the date that the stock price has at least tripled over the exercise price and the compounded annual gain over the exercise price is at least 25% and then ratably over three years (25% on each of the next three anniversaries of the achievement of the market condition)
Total Award	100	%

2015 Awards:
Options:
Service Condition:
Time-based	35	%	Ratably over four years (25% vesting on each of the first four anniversaries of the grant date.)
Stock Units:
Service Condition:
Time-based	16		Over four years with 1/3 vesting on each of the 2^nd, 3^rd and 4^th anniversaries of the grant date.
Market Condition:
Time-based vesting schedule and Market performance-based vesting date	49		Vest over four years with 25% vesting on each of the four anniversaries of the grant date. However, none are considered vested until the first trading day (if any) on or before the 4^th anniversary of the award date on which the average stock price equals or exceeds the price set in the individual award agreement, at which time all units that have met their time-based vesting schedule vest immediately with the remainder vesting in accordance with their time-based schedule.
Total Award	100	%

2016 - 2018 Awards:
Options:
Service Condition:
Time-based	9	%	Ratably over three years (1/3 vesting on each of the first three anniversaries of the grant date).
Stock Units:
Service Condition:
Time-based	55		Over three years with 1/3 vesting on each of the first three anniversaries of the grant date.
Market Condition:
Time-based vesting schedule and Market performance-based vesting date	36		Vest over four years with 25% vesting on each of the four anniversaries of the grant date. However, none are considered vested until the first trading day (if any) on or before the 4^th anniversary of the award date on which the average stock price equals or exceeds the price set in the individual award agreement, at which time all units that have met their time-based vesting schedule vest immediately with the remainder vesting in accordance with their time-based schedule.
Total Award	100	%

The contractual term of all options granted is ten years from the grant date, except where employment terminates by reason of death, disability or retirement, in which case, the agreement may provide for an earlier termination of the options. The terms of the market-based options do not include a retirement provision. Stock units have a four-year term. If the market conditions are not met by the fourth anniversary of the award of stock units, those units terminate on that date.



	Years Ended December 31,
Stock Options	2018				2017				2016
	Number of Options		Weighted Average Exercise Price		Number of Options		Weighted Average Exercise Price		Number of Options		Weighted Average Exercise Price
Outstanding at beginning of year	6,708,655		$	9.97	6,926,634		$	9.88	7,151,225		$	10.10
Granted (1)	348,385		3.66		—		—		—		—
Exercised (2)	—		—		—		—		(69,805	)	5.81
Forfeited / Expired (4)	(4,964,441	)	5.62		(217,979	)	7.16		(154,786	)	21.80
Outstanding at end of year (5)(6)	2,092,599		$	19.22	6,708,655		$	9.97	6,926,634		$	9.88

Exercisable at end of year (5)(6)(7)	1,520,039		$	21.29	6,234,830		$	8.87	6,344,958		$	8.71


(1)	Stock options granted in 2018 include 266,990 options awarded to Ocwen’s current Chief Executive Officer at an exercise price of $4.12 equal to the closing price of our common stock on the effective date of his employment, which was the closing date of the PHH acquisition.


(2)	The weighted average grant date fair value of stock options granted in 2018 was $2.63.


(3)	The total intrinsic value of stock options exercised, which is defined as the amount by which the market value of the stock on the date of exercise exceeds the exercise price was $0.1 million in 2016.


(4)	Includes 4,719,750 options which expired unexercised in 2018 because their exercise price was greater than the market price of Ocwen’s stock.


(5)	At December 31, 2018, 160,000 options with a market condition for vesting based on an average common stock trading price of $38.94, had not met their performance criteria. Outstanding and exercisable stock options at December 31, 2018 have a net aggregate intrinsic value of $0. A total of 870,939 market-based options were outstanding at December 31, 2018, of which 710,939 were exercisable.


(6)	At December 31, 2018, the weighted average remaining contractual term of options outstanding and options exercisable was 5.02 years and 3.87 years, respectively.


(7)	The total fair value of stock options that vested and became exercisable during 2018, 2017 and 2016, based on grant-date fair value, was $0.6 million, $0.7 million and $1.1 million, respectively.



	Years Ended December 31,
Stock Units	2018				2017				2016
	Number of Stock Units		Weighted Average Grant Date Fair Value		Number of Stock Units		Weighted Average Grant Date Fair Value		Number of Stock Units		Weighted Average Grant Date Fair Value
Unvested at beginning of year	2,753,918		$	3.69	2,752,054		$	3.91	835,730		$	10.00
Granted (1)(2)	1,809,373		3.57		971,761		2.56		2,184,100		2.19
Vested (3)(4)	(796,856	)	2.78		(896,272	)	3.26		(26,666	)	32.56
Forfeited/Cancelled (1)	(819,635	)	4.57		(73,625	)	2.20		(241,110	)	6.17
Unvested at end of year (5)(6)	2,946,800		$	3.75	2,753,918		$	3.69	2,752,054		$	3.91


(1)	Upon the resignation of Ocwen’s former Chief Executive Officer on June 30, 2018, 377,525 unvested stock units which would have been forfeited immediately were modified to allow continued vesting in accordance with the original terms. This had the equivalent effect of canceling the original award and granting a new award.


(2)	Stock units granted in 2018 include 983,010 units granted to Ocwen’s current Chief Executive Officer on the effective date of his employment, which was the closing date of the PHH acquisition.


(3)	The total intrinsic value of stock units vested, which is defined as the market value of the stock on the date of vesting, was $3.3 million, $4.6 million and $0.1 million for 2018, 2017 and 2016, respectively.


(4)	The total fair value of the stock units that vested during 2018, 2017 and 2016, based on grant-date fair value, was $2.2 million, $2.9 million and $0.9 million, respectively.

(5)

Excluding the 510,829 market-based stock awards that have not met their performance criteria, the net aggregate intrinsic value of stock awards outstanding at December 31, 2018 was $3.3 million. At December 31, 2018, 377,806, 40,000 and 93,023 stock units with a market condition for vesting based on an average common stock trading price of $16.26, $11.72 and $5.80 respectively, had not yet met the market condition.


(6)	At December 31, 2018, the weighted average remaining contractual term of share units outstanding was 2.46 years.

Compensation expense related to equity-based awards is measured based on the grant-date fair value of the awards using an appropriate valuation model based on the vesting conditions of the awards. The fair value of the time-based option awards was determined using the Black-Scholes options pricing model, while a lattice (binomial) model was used to determine the fair value of the market-based option awards. Lattice (binomial) models incorporate ranges of assumptions for inputs. Stock unit awards with only a service condition are valued at their intrinsic value, which is the market value of the stock on the date of the award. The fair value of Stock unit awards with both a service condition and a market-based vesting condition is based on the output of a Monte Carlo simulation.

The following assumptions were used to value awards:



	Years Ended December 31,
	2018		2017	2016
	Black-Scholes	Monte Carlo	Monte Carlo	Monte Carlo
Risk-free interest rate	2.79% – 3.14%	1.15% – 1.18%	1.12% – 1.18%	1.12%
Expected stock price volatility (1)	67%	71% - 74%	71% - 77%	77%
Expected dividend yield	—%	—%	—%	—%
Expected life (in years) (2)	8.5	(3)	(3)	(3)
Contractual life (in years)	N/A	N/A	N/A	N/A
Fair value	$1.53 - $2.96	$1.84 - $4.80	$2.00 - $4.80	$2.00


(1)	We generally estimate volatility based on the historical volatility of Ocwen’s common stock over the most recent period that corresponds with the estimated expected life of the option. For stock awards valued using a Monte Carlo simulation, volatility is computed as a blend of historical volatility and implied volatility based on traded options on Ocwen’s common stock.

(2)

For the options valued using the Black-Scholes model we determined the expected life based on historical experience with similar awards, giving consideration to the contractual term, exercise patterns and post vesting forfeitures. The expected term of the options valued using the lattice (binomial) model is derived from the output of the model. The lattice (binomial) model incorporates exercise assumptions based on analysis of historical data. For all options, the expected life represents the period of time that options granted were expected to be outstanding at the date of the award.

(3)

The stock units that contain both a service condition and a market-based condition are valued using the Monte Carlo simulation. The expected term is derived from the output of the simulation and represents the expected time to meet the market-based vesting condition. For equity awards with both service and market conditions, the requisite service period is the longer of the derived or explicit service period. In this case, the explicit service condition (vesting period) is the requisite service period, and the graded vesting method is used for expense recognition.

The following table sets forth equity-based compensation related to stock options and stock awards and the related excess tax benefit:



	Years Ended December 31,
	2018			2017		2016
Equity-based compensation expense
Stock option awards	$	(368	)	$	1,457	$	1,644
Stock awards	2,734			4,167		3,537
Excess tax benefit related to share-based awards	294			3,701		686

As of December 31, 2018, unrecognized compensation costs related to non-vested stock options amounted to $0.9 million, which will be recognized over a weighted-average remaining requisite service period of 2.56 years. Unrecognized compensation costs related to non-vested stock units as of December 31, 2018 amounted to $5.0 million, which will be recognized over a weighted-average remaining life of 2.46 years.