Stock-Based Compensation Plans
Description of the Plans
Effective April 26, 2012, our employees and non-employee directors became eligible to receive equity awards under the Marathon Petroleum Corporation 2012 Incentive Compensation Plan (“MPC 2012 Plan”). The MPC 2012 Plan authorizes the Compensation Committee of our board of directors (“Committee”) to grant non-qualified or incentive stock options, stock appreciation rights, stock awards (including restricted stock and restricted stock unit awards), cash awards and performance awards to our employees, non-employee directors and other plan participants. Under the MPC 2012 Plan, no more than 25 million shares of our common stock may be delivered and no more than 10 million shares of our common stock may be the subject of awards that are not stock options or stock appreciation rights. In the sole discretion of the Committee, 10 million shares of our common stock may be granted as incentive stock options. Shares issued as a result of awards granted under these plans are funded through the issuance of new MPC common shares.
Prior to the 2011 Spinoff, our employees participated in the Marathon Oil Corporation 2007 Incentive Compensation Plan (“2007 Plan”) and the Marathon Oil Corporation 2003 Incentive Compensation Plan (“2003 Plan”) and received Marathon Oil restricted stock awards and options to purchase shares of Marathon Oil common stock. Effective June 30, 2011, our employees and non-employee directors became eligible to receive equity awards under the Marathon Petroleum Corporation 2011 Second Amended and Restated Incentive Compensation Plan (“MPC 2011 Plan”).
In connection with the Spinoff, stock compensation awards granted under the 2007 Plan and the 2003 Plan and held by grantees as of June 30, 2011 were adjusted or substituted as follows:
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• | Vested stock options were adjusted and substituted so that the grantee holds options to purchase both MPC and Marathon Oil common stock. |
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• | Unvested stock option awards held by MPC employees were replaced with substitute awards of options to purchase shares of MPC common stock. |
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• | The adjustment to the Marathon Oil and MPC stock options, when combined, was intended to generally preserve the intrinsic value of each option grant and the ratio of the exercise price to the fair market value of Marathon Oil common stock on June 30, 2011. |
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• | Unvested restricted stock awards were replaced with adjusted, substitute awards for restricted shares or units, as applicable, of MPC common stock. The new awards of restricted stock were intended to generally preserve the intrinsic value of the award determined as of June 30, 2011. |
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• | Vesting periods of awards were unaffected by the adjustment and substitution. |
Awards granted in connection with the adjustment and substitution of awards originally issued under the 2007 Plan and the 2003 Plan are a part of the MPC 2011 Plan and reduce the maximum number of shares of MPC common stock available for delivery under the MPC 2011 Plan.
There were 393 MPC employees affected by the adjustment and substitution of awards. The adjustment and substitution of awards did not cause us to recognize incremental compensation expense.
Stock-based awards under the Plans
We expense all share-based payments to employees and non-employee directors based on the grant date fair value of the awards over the requisite service period, adjusted for estimated forfeitures.
Stock Options - We grant stock options to certain officer and non-officer employees and other plan participants. Stock options previously granted under the 2003 Plan and 2007 Plan remain held by employees, subject to the adjustment and substitution of awards described above. All of the stock options granted in 2013 fell under the MPC 2012 Plan. Stock options awarded under the MPC 2011 Plan and the MPC 2012 Plan represent the right to purchase shares of our common stock at its fair market value, which is the closing price of MPC's common stock on the date of grant. Stock options have a maximum term of ten years from the date they are granted, and vest over a requisite service period of three years. We use the Black Scholes option-pricing model to estimate the fair value of stock options granted, which requires the input of subjective assumptions.
Stock Appreciation Rights (“SARs”) – Prior to 2005, SARs were granted under the 2003 Plan. No SARs have been granted under the 2007 Plan, the MPC 2011 Plan or the MPC 2012 Plan. Similar to stock options, SARs represent the right to receive a payment equal to the excess of the fair market value of shares of MPC or Marathon Oil common stock (in accordance with the adjustment and substitution of awards described above) on the date the right is exercised over the grant price. SARs have a maximum term of ten years from the date they are granted and generally vest over a requisite service period of three years. We use the Black Scholes option-pricing model to estimate the fair value of SARs granted, which requires the input of subjective assumptions.
Restricted Stock and Restricted Stock Units – We grant restricted stock and restricted stock units to employees, non-employee directors and other plan participants. Restricted stock and restricted stock units previously granted under the 2003 Plan and the 2007 Plan remain held by employees and non-employee directors, subject to the adjustment and substitution of awards described above. In general, restricted stock and restricted stock units granted to employees vest over a requisite service period of three years. Restricted stock and restricted stock unit awards granted after 2011 to officers are subject to an additional one year holding period after the completion of the three-year requisite service period. Prior to vesting, restricted stock recipients who received grants prior to 2012 have the right to vote such stock and receive dividends at the same time regular shareholders are paid. Restricted stock recipients who received grants in 2012 and after have the right to vote such stock; however, dividends are accrued and will be paid upon vesting. Restricted stock units granted to non-employee directors are considered to vest immediately at the time of the grant for accounting purposes, as they are non-forfeitable, but are not issued until the director’s departure from the board of directors. Restricted stock unit recipients do not have the right to vote such shares and receive dividend equivalents. The non-vested shares are not transferable and are held by our transfer agent. The fair values of restricted stock are based on the fair value of our common stock on the grant date.
Performance Units – We grant performance unit awards to certain officer employees. The target value of all performance units is $1.00, with actual payout up to $2.00 per unit (up to 200% of target). Performance units issued prior to 2012 are paid in cash at the end of the 30-month vesting period at an amount per unit determined based on the total shareholder return ("TSR") of MPC common stock compared to the TSR of selected peer companies’ stock. Performance units issued in 2012 and 2013 under the MPC 2011 and MPC 2012 Plans have a 36-month requisite service period. The payout value of these awards will be determined by the relative ranking of the TSR of MPC common stock compared to the TSR of a select group of peer companies, as well as the Standard & Poor's 500 Energy Index fund over four measurement periods. These awards will be settled 25 percent in MPC common stock and 75 percent in cash. The number of shares actually distributed will be determined by dividing 25 percent of the final payout by the closing price of MPC common stock on the day the Committee certifies the final TSR rankings, or the next trading day if the certification is made outside of normal trading hours. The performance units paying out in cash are accounted for as liability awards and those that settle in shares are accounted for as equity awards. The performance units settling in shares had a grant date fair value of $1.12 per unit for 2013 and $1.09 per unit for 2012, as calculated using a Monte Carlo valuation model.
Total Stock-Based Compensation Expense
Total employee stock-based compensation expense was $42 million, $35 million and $28 million in 2013, 2012 and 2011, while the total related income tax benefits were $15 million, $13 million and $11 million, respectively. In 2013, 2012 and in 2011 for the period subsequent to the Spinoff, cash received by MPC upon exercise of stock option awards was $48 million, $108 million and $1 million, respectively. In 2011 for periods prior to the Spinoff, cash received by Marathon Oil upon exercise of stock option awards by MPC employees was $17 million. In 2013, 2012 and in 2011 for the period subsequent to the Spinoff, tax benefits realized by MPC for deductions for stock awards exercised were $18 million, $16 million and less than $1 million, respectively. In 2011 for periods prior to the Spinoff, tax benefits realized by Marathon Oil for deductions for stock awards exercised by MPC employees were $7 million.
Stock Option Awards
The Black Scholes option-pricing model values used to value stock option awards granted were determined based on the following weighted average assumptions (information for periods prior to the Spinoff was based on stock option awards for Marathon Oil common stock):
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| 2013 | | 2012 | | 2011 subsequent to Spinoff | | 2011 prior to Spinoff |
Weighted average exercise price per share | $ | 84.65 |
| | $ | 42.02 |
| | $ | 36.18 |
| | $ | 51.93 |
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Expected annual dividends per share | $ | 1.40 |
| | $ | 1.00 |
| | $ | 0.95 |
| | $ | 1.00 |
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Expected life in years | 6.0 |
| | 5.8 |
| | 5.8 |
| | 5.3 |
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Expected volatility | 40 | % | | 47 | % | | 48 | % | | 40 | % |
Risk-free interest rate | 1.0 | % | | 1.1 | % | | 1.4 | % | | 2.0 | % |
Weighted average grant date fair value of stock option awards granted | $ | 27.13 |
| | $ | 14.45 |
| | $ | 13.08 |
| | $ | 16.73 |
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Expected annual dividends per share is estimated using the most recent dividend payment per share as of the grant date. The expected life of stock options granted is based on historical data and represents the period of time that options granted are expected to be held prior to exercise. The assumption for expected volatility of our stock price reflects a weighting of 33 percent of our common stock implied volatility and 67 percent of the historical volatility for a selected group of peer companies. The risk-free interest rate for periods within the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.
The following is a summary of our common stock option activity in 2013:
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| Number of of Shares(a) | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value (In millions) |
Outstanding at December 31, 2012 | 6,172,194 |
| | $ | 36.17 |
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Granted | 408,603 |
| | 84.65 |
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Exercised | (1,348,938 | ) | | 35.48 |
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Forfeited, canceled or expired | (84,022 | ) | | 43.97 |
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Outstanding at December 31, 2013 | 5,147,837 |
| | 40.08 |
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Vested and expected to vest at December 31, 2013 | 5,142,351 |
| | 40.04 |
| | 6.0 | | $ | 266 |
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Exercisable at December 31, 2013 | 3,674,485 |
| | 34.63 |
| | 5.3 | | 210 |
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(a) | Includes an immaterial number of stock appreciation rights. |
The intrinsic value of options exercised by MPC employees during 2013, 2012 and in 2011 for periods subsequent to the Spinoff was $60 million, $37 million and $1 million, respectively. The intrinsic value of options to purchase Marathon Oil common stock exercised by MPC employees under the 2007 Plan and 2003 Plan during 2011 for periods prior to the Spinoff was $18 million.
As of December 31, 2013, unrecognized compensation cost related to stock option awards was $7 million, which is expected to be recognized over a weighted average period of 0.7 years.
Restricted Stock Awards
The following is a summary of restricted stock award activity of our common stock in 2013:
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| Shares of Restricted Stock (“RS”) | | Restricted Stock Units (“RSU”) |
| Number of Shares | | Weighted Average Grant Date Fair Value | | Number of Units | | Weighted Average Grant Date Fair Value |
Outstanding at December 31, 2012 | 638,073 |
| | $ | 40.83 |
| | 359,111 |
| | $ | 31.07 |
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Granted | 256,224 |
| | 87.06 |
| | 26,399 |
| | 73.48 |
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RS's Vested/RSU's Issued | (245,116 | ) | | 37.95 |
| | (431 | ) | | 39.53 |
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Forfeited | (25,059 | ) | | 58.60 |
| | — |
| | — |
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Outstanding at December 31, 2013 | 624,122 |
| | 61.11 |
| | 385,079 |
| | 33.96 |
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Of the 385,079 restricted units outstanding, 383,953 are vested and have a weighted average grant date fair value of $33.89. These vested but unissued units are held by our non-employee directors, are non-forfeitable and are issuable upon the director’s departure from our board of directors.
The following is a summary of the values related to restricted stock and restricted stock unit awards held by MPC employees and non-employee directors (information for periods prior to the Spinoff is for restricted stock and restricted stock unit awards of Marathon Oil common stock):
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| Restricted Stock | | Restricted Stock Units |
| Intrinsic Value of Awards Vesting During the Period (In millions) | | Weighted Average Grant Date Fair Value of Awards Granted During the Period | | Intrinsic Value of Awards Issued During the Period (In millions) | | Weighted Average Grant Date Fair Value of Awards Granted During the Period |
2013 | $ | 20 |
| | $ | 87.06 |
| | $ | — |
| | $ | 73.48 |
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2012 | 5 |
| | 43.11 |
| | — |
| | 44.38 |
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2011- Subsequent to the Spinoff | 1 |
| | 41.54 |
| | — |
| | 33.78 |
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2011- Prior to the Spinoff | 3 |
| | 48.53 |
| | — |
| | 45.22 |
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As of December 31, 2013, unrecognized compensation cost related to restricted stock awards was $24 million, which is expected to be recognized over a weighted average period of 1.3 years. There was no material unrecognized compensation cost related to restricted stock unit awards.
Performance Unit Awards
The following table presents a summary of the 2013 activity for performance unit awards to be settled in shares:
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| Number of Units |
Outstanding at December 31, 2012 | 2,040,000 |
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Granted | 1,782,500 |
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Settled | — |
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Canceled | — |
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Outstanding at December 31, 2013 | 3,822,500 |
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The number of shares that would be issued upon target vesting, using the closing price of our common stock on December 31, 2013 would be 41,671 shares.
MPLX Awards
Our wholly-owned subsidiary and the general partner of MPLX, MPLX GP LLC (“MXGP”), maintains a unit-based compensation plan for officers, directors and employees (including any other individual who may be considered an “employee” under a Registration Statement on Form S-8 or any successor form) of MXGP.
The MPLX 2012 Incentive Compensation Plan (“MPLX Plan”) permits various types of equity awards including but not limited to grants of restricted phantom units and performance units. Awards granted under the MPLX Plan will be settled with MPLX units. Compensation expense for these awards was not material to our consolidated financial statements for the years ended December 31, 2013 and 2012.
