VALERO ENERGY CORP/TX | 2013 | FY | 3


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.
 
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.




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

 
 
 
 
 
 
 
 
Exercisable as of December 31, 2013
8,037,807

 
27.66

 
3.1
 
206

The following table reflects activity related to our stock options granted (in millions, except per share data):
 
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

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.





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.
 
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:
 
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

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:
 
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

Total
651,190

 
 
 
534,515

 
116,675


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