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15. | STOCK-BASED COMPENSATION |
We maintain the 2011 Omnibus Stock Incentive Plan (the OSIP) under which various stock and stock-based awards are granted to employees and non-employee directors. Awards available under the OSIP include options to purchase shares of common stock, performance awards that vest upon the achievement of an objective performance goal, stock appreciation rights, and restricted stock that vests over a period determined by our compensation committee. The OSIP was approved by our stockholders on April 28, 2011. As of December 31, 2013, 15,340,981 shares of our common stock remained available to be awarded under the OSIP.
We also maintain other stock-based compensation plans under which previously granted equity awards remain outstanding. No additional grants may be awarded under these plans.
In connection with the separation of our retail business on May 1, 2013 (as further described in Note 3), we entered into an employee matters agreement with CST, which provides that employees of CST no longer participate in our benefit plans. Under this agreement, we made certain adjustments to the exercise price and the number of our share-based compensation awards, the effect of which preserved the intrinsic value of the awards immediately prior to the separation; no incremental value resulted from these adjustments. Also upon the separation, awards of restricted stock and performance shares made to Valero employees who became employees of CST were either vested or forfeited. These adjustments are reflected in the activity tables below.
The following table reflects activity related to our stock-based compensation arrangements (in millions):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2013 | | 2012 | | 2011 |
Stock-based compensation expense | $ | 64 |
| | $ | 58 |
| | $ | 58 |
|
Tax benefit recognized on stock-based compensation expense | 22 |
| | 20 |
| | 20 |
|
Tax benefit realized for tax deductions resulting from exercises and vestings | 66 |
| | 45 |
| | 35 |
|
Effect of tax deductions in excess of recognized stock-based compensation expense reported as a financing cash flow | 47 |
| | 27 |
| | 23 |
|
Each of our stock-based compensation arrangements is discussed below.
Stock Options
Under the terms of our various stock-based compensation plans, the exercise price of options granted is not less than the fair market value of our common stock on the date of grant. Stock options become exercisable pursuant to the individual written agreements between the participants and us, usually in three equal annual installments beginning one year after the date of grant, with unexercised options generally expiring seven or ten years from the date of grant.
The fair value of stock options granted during 2013 and 2012 were estimated using the Monte Carlo simulation model, as these options contain both a service condition and a market condition in order to be exercised. Prior to 2012, the fair value of each stock option grant was estimated on the grant date using the Black-Scholes option-pricing model. The expected life of options granted is the period of time from the grant date to the date of expected exercise or other expected settlement. The expected life for each of the years in the table below was calculated using the safe harbor provisions of SEC Staff Accounting Bulletin No. 107 and No. 110 related to share-based payments. Because the stock options granted in 2012 and later contain a market condition, historical exercise patterns did not provide a reasonable basis for estimating the expected life. Expected volatility is based on closing prices of our common stock for periods corresponding to the expected life of options granted. Expected dividend yield is based on annualized dividends at the date of grant. The risk-free interest rate used is the implied yield currently available from the U.S. Treasury zero-coupon issues with a remaining term equal to the expected life of the options at the grant date.
A summary of the weighted-average assumptions used in our fair value measurements is presented in the table below.
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| | | | | | | | |
| Year Ended December 31, |
| 2013 | | 2012 | | 2011 |
Expected life in years | 6.0 |
| | 6.0 |
| | 6.0 |
|
Expected volatility | 49.63 | % | | 49.11 | % | | 49.30 | % |
Expected dividend yield | 2.27 | % | | 2.39 | % | | 2.28 | % |
Risk-free interest rate | 1.77 | % | | 0.85 | % | | 1.44 | % |
A summary of the status of our stock option awards is presented in the table below.
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| | | | | | | | | | | | |
| Number of Stock Options | | Weighted- Average Exercise Price Per Share | | Weighted- Average Remaining Contractual Term | | Aggregate Intrinsic Value |
| | | | | (in years) | | (in millions) |
Outstanding as of January 1, 2013 | 13,214,728 |
| | $ | 28.54 |
| |
| |
|
Granted | 201,300 |
| | 39.67 |
| |
| |
|
Exercised | (3,837,090 | ) | | 15.21 |
| |
| |
|
Expired | (1,780,113 | ) | | 49.45 |
| | | | |
Options granted on conversion related to separation of retail business | 759,268 |
| | 28.84 |
| | | | |
Outstanding as of December 31, 2013 | 8,558,093 |
| | 27.88 |
| | 3.5 | | $ | 216 |
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| | | | | | | |
Exercisable as of December 31, 2013 | 8,037,807 |
| | 27.66 |
| | 3.1 | | 206 |
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The following table reflects activity related to our stock options granted (in millions, except per share data):
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| | | | | | | | | | | |
| Year Ended December 31, |
| 2013 | | 2012 | | 2011 |
Weighted average grant-date fair value price per share | $ | 15.83 |
| | $ | 10.98 |
| | $ | 10.10 |
|
Intrinsic value of stock options exercised | 101 |
| | 78 |
| | 63 |
|
Cash received from stock option exercises | 59 |
| | 59 |
| | 49 |
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As of December 31, 2013, there was $1 million of unrecognized compensation cost related to outstanding unvested stock option awards, which is expected to be recognized over a weighted-average period of approximately two years.
Restricted Stock
Restricted stock is granted to employees and non-employee directors. Restricted stock granted to employees vests in accordance with individual written agreements between the participants and us, usually in equal annual installments over a period of three to five years beginning one year after the date of grant. Restricted stock granted to our non-employee directors generally vests in three years following the date of grant. A summary of the status of our restricted stock awards is presented in the table below.
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| | | | | | |
|
Number of Shares | | Weighted- Average Grant-Date Fair Value Per Share |
Nonvested shares as of January 1, 2013 | 2,920,288 |
| | $ | 24.76 |
|
Granted | 1,255,742 |
| | 39.55 |
|
Vested | (2,113,647 | ) | | 23.73 |
|
Forfeited | (31,546 | ) | | 23.73 |
|
Shares granted on conversion related to separation of retail business | 174,477 |
| | 23.42 |
|
Nonvested shares as of December 31, 2013 | 2,205,314 |
| | 32.23 |
|
As of December 31, 2013, there was $40 million of unrecognized compensation cost related to outstanding unvested restricted stock awards, which is expected to be recognized over a weighted-average period of approximately two years. The total fair value of restricted stock that vested during the years ended December 31, 2013, 2012, and 2011 was $74 million, $47 million, and $32 million, respectively.
Performance Awards
Performance awards are issued to certain of our key employees and represent rights to receive shares of our common stock upon the achievement by us of an objective performance measure. The objective performance measure is our total shareholder return, which is ranked among the total shareholder returns of a defined peer group of companies. Our ranking determines the rate at which the performance awards convert into our common shares. Conversion rates can range from zero to 200 percent.
Performance awards vest in equal one-third increments (tranches) on an annual basis. Our compensation committee establishes the peer group of companies for each tranche of awards at the beginning of the one year vesting period for that tranche. Therefore, performance awards are not considered to be granted for accounting purposes until our compensation committee establishes the peer group of companies for each tranche of awards. The fair value of each tranche of awards is determined at the time the awards are considered to be granted and is based on the expected conversion rate for those awards and the fair value per share. Fair value per share is equal to the market price of our common stock on the grant date reduced by expected dividends over that tranche’s vesting period.
A summary of the status of our performance awards considered granted is presented below.
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| | | | | |
| Nonvested Awards | | Vested Awards |
Awards outstanding as of January 1, 2013 | 989,414 |
| | 208,916 |
|
Granted | 415,317 |
| | — |
|
Vested | (442,274 | ) | | 442,274 |
|
Converted | — |
| | (534,515 | ) |
Forfeited | (50,076 | ) | | (116,675 | ) |
Shares granted on conversion related
to separation of retail business | 34,784 |
| | — |
|
Awards outstanding as of December 31, 2013 | 947,165 |
| | — |
|
There were three tranches of performance awards granted during the year ended December 31, 2013 as follows:
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| | | | | | | | |
| Awards Granted | | Expected Conversion Rate | | Fair Value Per Share |
Third tranche of 2011 awards | 227,565 |
| | 100% | | $ | 38.77 |
|
Second tranche of 2012 awards | 105,030 |
| | 100% | | 38.77 |
|
First tranche of 2013 awards | 82,722 |
| | 100% | | 38.77 |
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Total | 415,317 |
| | | | |
As of December 31, 2013, there was $16 million of unrecognized compensation cost related to outstanding unvested performance awards, which will be recognized during 2014. The total fair value of performance awards that vested during the years ended December 31, 2013, 2012, and 2011 was $12 million, $3 million, and $4 million, respectively.
Performance awards converted during the year ended December 31, 2013 were as follows:
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| | | | | | | | | | |
| Vested Awards Converted | | Actual Conversion Rate | | Number of Shares Issued | | Awards Forfeited |
2010 awards | 417,833 |
| | 100% | | 417,833 |
| | — |
|
2011 awards | 233,357 |
| | 50% | | 116,682 |
| | 116,675 |
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Total | 651,190 |
| | | | 534,515 |
| | 116,675 |
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