| 13. | Share-based Compensation |
The Corporation granted restricted common shares and performance share units (PSUs) in 2013 and 2012 under its 2008 Long-term Incentive Plan (LTIP), as amended. The Corporation began awarding PSUs under this plan in March 2012. Prior to 2012, the Corporation awarded restricted common stock and stock options. Outstanding restricted stock and PSUs generally vest three years from the date of grant. Outstanding stock options vest over three years from the date of grant and have a 10-year term and an exercise price equal to the market price on the date of grant.
The number of shares of common stock to be issued under the PSU agreement is based on a comparison of the Corporation’s total shareholder return (TSR) to the TSR of a predetermined group of fifteen peer companies over a three-year performance period ending December 31 of the year prior to grant issuance. Payouts of the performance share awards will range from 0% to 200% of the target awards based on the Corporation’s TSR ranking within the peer group. Dividend equivalents for the performance period will accrue on performance shares, but will only be paid out on earned shares after the performance period.
Share-based compensation expense consisted of the following:
| Before Income Taxes | After Income Taxes | |||||||||||||||||||||||
| 2013 | 2012 | 2011 | 2013 | 2012 | 2011 | |||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||
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Restricted stock |
$ | 31 | $ | 57 | $ | 53 | $ | 19 | $ | 35 | $ | 32 | ||||||||||||
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Stock options |
13 | 34 | 51 | 8 | 21 | 31 | ||||||||||||||||||
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Performance share units |
10 | 8 | — | 6 | 5 | — | ||||||||||||||||||
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Total* |
$ | 54 | $ | 99 | $ | 104 | $ | 33 | $ | 61 | $ | 63 | ||||||||||||
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| * |
Includes pre-tax share-based compensation expense (benefit) included in Income from discontinued operations of approximately $(6) million, $16 million and $18 million for 2013, 2012 and 2011, respectively. |
During 2013, the Corporation reversed share-based compensation expenses totaling $33 million ($25 million for restricted stock, $7 million for PSUs and $1 million for stock options) for grants that are not expected to vest as a result of the Corporation’s transformation to a pure play E&P company.
Based on share-based compensation awards outstanding at December 31, 2013, unearned compensation expense, before income taxes, will be recognized in future years as follows (in millions): 2014 — $45, 2015 — $27 and 2016 — $4.
The Corporation’s share-based compensation activity consisted of the following:
| Performance Share Units | Stock Options | Restricted Stock | ||||||||||||||||||||||
| Performance Share Units |
Weighted- Average Fair Value on Date of Grant |
Options | Weighted- Average Exercise Price per Share |
Shares of Restricted Common Stock |
Weighted- Average Price on Date of Grant |
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| (In thousands) | (In thousands) | (In thousands) | ||||||||||||||||||||||
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Outstanding at January 1, 2013 |
414 | $ | 73.26 | 12,903 | $ | 61.45 | 2,904 | $ | 66.89 | |||||||||||||||
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Granted |
279 | 111.49 | — | — | 1,207 | 69.49 | ||||||||||||||||||
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Exercised |
— | — | (2,323 | ) | 51.17 | — | — | |||||||||||||||||
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Vested |
— | — | — | — | (812 | ) | 60.52 | |||||||||||||||||
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Forfeited |
(58 | ) | 79.99 | (439 | ) | 78.41 | (434 | ) | 69.78 | |||||||||||||||
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Outstanding at December 31, 2013* |
635 | $ | 89.45 | 10,141 | $ | 63.08 | 2,865 | $ | 69.36 | |||||||||||||||
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| * |
Includes 9,570 thousand exercisable options at a weighted average price of $61.99 at December 31, 2013. |
The table below summarizes information regarding the outstanding and exercisable stock options as of December 31, 2013:
| Outstanding Options | Exercisable Options | |||||||||||||||||
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Range
of |
Options | Weighted- Average Remaining Contractual Life |
Weighted- Average Exercise Price per Share |
Options | Weighted- Average Exercise Price per Share |
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| (In thousands) | (Years) | (In thousands) | ||||||||||||||||
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$20.00 – $40.00 |
629 | 1 | $ | 28.16 | 629 | $ | 28.16 | |||||||||||
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$40.01 – $50.00 |
1,223 | 2 | 49.34 | 1,217 | 49.36 | |||||||||||||
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$50.01 – $60.00 |
3,064 | 4 | 54.98 | 3,031 | 54.98 | |||||||||||||
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$60.01 – $80.00 |
1,818 | 6 | 60.64 | 1,797 | 60.55 | |||||||||||||
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$80.01 – $120.00 |
3,407 | 5 | 83.04 | 2,896 | 82.89 | |||||||||||||
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| 10,141 | 4 | $ | 63.08 | 9,570 | $ | 61.99 | ||||||||||||
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The intrinsic value (or the amount by which the market price of the Corporation’s common stock exceeds the exercise price of an option) at December 31, 2013 totaled $204 million and $203 million for outstanding options and exercisable options, respectively. At December 31, 2013, the weighted average remaining contractual term of exercisable options was four years.
The following weighted average assumptions were utilized to estimate the fair value of PSU awards:
| 2013 | 2012 | |||||||
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Risk free interest rate |
0.36 | % | 0.40 | % | ||||
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Stock price volatility |
.359 | .394 | ||||||
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Contractual term in years |
3.0 | 3.0 | ||||||
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Grant date price of Hess common stock |
$ | 69.49 | $ | 64.14 | ||||
The risk free interest rate is based on the vesting period of the award and is obtained from published sources. The stock price volatility is determined from the historical stock prices of the peer group using the vesting period. The contractual term is equivalent to the vesting period.
In May 2008, shareholders approved the 2008 LTIP, which was amended in May 2010 and May 2012 to increase the number of new shares of common stock available for awards. At December 31, 2013, the Corporation had 10.2 million shares that remain available for issuance under the 2008 LTIP, as amended, out of the total of 29 million shares of common stock authorized for issuance under the 2008 LTIP, as amended.