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Stock-Based Compensation Plans
12 Months Ended
Dec. 31, 2018
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
Stock-Based Compensation Plans
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 Amended and Restated 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 and non-employee directors. Under the MPC 2012 Plan, no more than 50 million shares of our common stock may be delivered and no more than 20 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, 20 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 April 26, 2012, our employees and non-employee directors were 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 Andeavor acquisition, in October of 2018 we converted the outstanding option and equity incentive awards (other than awards held by non-employee directors of Andeavor, which awards were paid out in connection with the acquisition) under the Andeavor Plans to awards that provide for rights to acquire (in the case of options) or be settled in or otherwise determined in reference to shares of MPC common stock in place of shares of Andeavor common stock (in the case of equity incentive awards). As part of that conversion we used an exchange ratio for the respective share prices of Andeavor common stock and MPC common stock to ensure that the award holders’ economic opportunity remained constant, and for converted awards which included a performance component, performance was determined at the time of the conversion and the awards became subject to a time-based vesting only design. The converted awards otherwise continue to be subject to the terms and conditions of their award agreements and the applicable Andeavor Plan under which such awards were granted. The “Andeavor Plans” as to which the award conversions apply are: the Tesoro Corporation 2006 Long-Term Incentive Plan; the Andeavor Amended and Restated 2011 Long-Term Incentive Plan; the Andeavor 2018 Long-Term Incentive Plan; and the Amended and Restated Northern Tier Energy LP 2012 Long-Term Incentive Plan.
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. All of the stock options granted in 2018 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.
Restricted Stock and Restricted Stock Units – We grant restricted stock and restricted stock units to employees and non-employee directors. 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 three-year vesting period. 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 payable upon vesting. The non-vested shares are not transferable and are held by our transfer agent. The fair values of restricted stock are equal to the market price of our common stock on the grant date.
Performance Units – We grant performance unit awards to certain officer employees. Performance units are dollar denominated. The target value of all performance units is $1.00, with actual payout up to $2.00 per unit (up to 200 percent of target). Performance units issued under the MPC 2012 Plan have a 36-month requisite service period. The payout value of these awards will be determined by the relative ranking of the total shareholder return (“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 an average of 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 recorded at fair value with a mark-to-market adjustment made each quarter. The performance units that settle in shares are accounted for as equity awards.
Total Stock-Based Compensation Expense
The following table reflects activity related to our stock-based compensation arrangements, including the converted awards related to the acquisition of Andeavor:
(In millions)
2018
 
2017
 
2016
Stock-based compensation expense
$
133

 
$
51

 
$
45

Tax benefit recognized on stock-based compensation expense
32

 
19

 
17

Cash received by MPC upon exercise of stock option awards
24

 
46

 
10

Tax benefit received for tax deductions for stock awards exercised
14

 
25

 
4


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:
 
2018
 
2017
 
2016
Weighted average exercise price per share
$
67.71

 
$
50.57

 
$
35.27

Expected life in years
6.2

 
6.3

 
6.2

Expected volatility
34
%
 
35
%
 
38
%
Expected dividend yield
3.0
%
 
3.0
%
 
3.0
%
Risk-free interest rate
2.7
%
 
2.1
%
 
1.4
%
Weighted average grant date fair value of stock option awards granted
$
17.21

 
$
13.42

 
$
9.84


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 2018 assumption for expected volatility of our stock price reflects a weighting of 50 percent of our common stock implied volatility and 50 percent of our common stock historical volatility. 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 2018: 
 
Number of
of Shares
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Terms (in years)
 
Aggregate Intrinsic Value (in millions)
Outstanding at December 31, 2017
8,465,398

 
$
33.74

 
 
 
 
Granted
903,797

 
67.71

 
 
 
 
Converted in acquisition
302,403

 
7.00

 
 
 
 
Exercised
(916,566
)
 
26.24

 
 
 
 
Forfeited or expired
(30,437
)
 
48.96

 
 
 
 
Outstanding at December 31, 2018
8,724,595

 
37.07

 
 
 
 
Vested and expected to vest at December 31, 2018
8,707,148

 
37.01

 
5.1
 
$
199

Exercisable at December 31, 2018
6,586,859

 
31.42

 
4.0
 
182


The intrinsic value of options exercised by MPC employees during 2018, 2017 and 2016 was $44 million, $75 million and $14 million, respectively.
As of December 31, 2018, unrecognized compensation cost related to stock option awards was $10 million, which is expected to be recognized over a weighted average period of 1.2 years.
Restricted Stock Awards
The following is a summary of restricted stock award activity of our common stock in 2018:
 
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, 2017
1,188,662

 
$
45.07

 
285,164

 
$
29.95

Granted
470,951

 
71.19

 
24,430

 
72.43

Converted in acquisition
16,972

 
82.43

 
4,452,751

 
82.43

RS Vested/RSUs Issued
(624,934
)
 
45.98

 
(526,254
)
 
65.34

Forfeited
(60,951
)
 
50.27

 
(9,235
)
 
82.43

Outstanding at December 31, 2018
990,700

 
57.23

 
4,226,856

 
80.96


Of the 4,226,856 restricted stock units outstanding, 1,106,740 are vested and have a weighted average grant date fair value of $76.90. These vested but unissued units are held by our non-employee directors, certain of our officers and certain former officers and employees of Andeavor, are non-forfeitable and are issuable upon the director’s departure from our board of directors or officers end of employment with the company or, for certain former officers and employees of Andeavor, upon the expiration of a waiting period under Section 409A of the Code.
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:
 
Restricted Stock
 
Restricted Stock Units
 
Intrinsic Value of Awards Vested During the Period (in millions)
 
Weighted Average Grant Date Fair Value of Awards Granted During the Period
 
Intrinsic Value of Awards Vested During the Period (in millions)
 
Weighted Average Grant Date Fair Value of Awards Granted During the Period
2018
$
49

  
$
71.19

  
$
39

  
$
72.43

2017
28

  
50.25

  
5

  
53.19

2016
17

 
36.17

 
8

 
40.85


As of December 31, 2018, unrecognized compensation cost related to restricted stock awards was $35 million, which is expected to be recognized over a weighted average period of 1.2 years. Unrecognized compensation cost related to restricted stock unit awards was $110 million, which is expected to be recognized over a weighted average period of 1.10 years.
Performance Unit Awards
The following table presents a summary of the 2018 activity for performance unit awards to be settled in shares:
 
Number of Units
 
Weighted Average Grant Date Fair Value
Outstanding at December 31, 2017
6,851,542

 
$
0.81

Granted
3,830,000

 
0.83

Vested
(2,052,959
)
 
0.95

Forfeited
(10,000
)
 
0.92

Outstanding at December 31, 2018
8,618,583

 
0.79


The number of shares that would be issued upon target vesting, using the closing price of our common stock on December 31, 2018 would be 146,053 shares.
As of December 31, 2018, unrecognized compensation cost related to equity-classified performance unit awards was $3 million, which is expected to be recognized over a weighted average period of 1.3 years.
Performance units to be settled in MPC shares have a grant date fair value calculated using a Monte Carlo valuation model, which requires the input of subjective assumptions. The following table provides a summary of these assumptions:
 
2018
 
2017
 
2016
Risk-free interest rate
2.3
%
 
1.5
%
 
1.0
%
Look-back period (in years)
2.8

 
2.8

 
2.8

Expected volatility
34.0
%
 
36.1
%
 
34.2
%
Grant date fair value of performance units granted
$
0.83

 
$
0.92

 
$
0.57


The risk-free interest rate for the remaining performance period as of the grant date is based on the U.S. Treasury yield curve in effect at the time of the grant. The look-back period reflects the remaining performance period at the grant date. The assumption for the expected volatility of our stock price reflects the average MPC common stock historical volatility.
MPLX and ANDX Awards
Compensation expense for awards related to MPLX and ANDX was not material to our consolidated financial statements for 2018.