16. Stock-based Compensation and Outstanding Awards

Under the terms of the NOW Inc. Long Term Incentive Plan (the “Plan”), 16 million shares of the Company’s common stock were authorized for grant to employees, non-employee directors and other persons. The Plan provides for the grant of stock options, restricted stock units and performance stock awards.

Stock-based compensation expense recognized for the years ended December 31, 2017, 2016 and 2015 totaled $20 million, $23 million and $27 million, respectively. Tax benefit recognized from this expense for the years ended December 31, 2017, 2016 and 2015 was $7 million, $6 million and $7 million, respectively.

Each of the stock-based compensation arrangements are discussed below.

Stock Options

Stock option awards are generally granted with an exercise price equal to the market price of the Company’s stock at the date of grant. Stock option awards generally have either a 7-year or a 10-year contractual term and vest over a 3-year period from the grant date on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was, in-substance, multiple awards. The grant-date fair value of stock options is determined using the Black-Scholes framework. Additionally, the Company’s stock options provide for full vesting of unvested outstanding options, in the event of a change of control of the Company and a change in the holder’s responsibilities following a change in control of the Company.

For the stock options granted in 2017, 2016 and 2015, the fair value of each option award was estimated on the date of grant using the Black-Scholes framework that uses the assumptions noted in the table below. The expected volatility was based on the implied volatility on the Company’s stock, historical volatility of the Company’s stock, and the historical volatility of other, similar companies. The risk-free rate was based on the U.S. Treasury yield curve in effect at the time of grant for the period consistent with the expected term. The expected dividends were based on the Company’s history and expectation of dividend payouts. The expected term was based on the average of the vesting period and contractual term.

	December 31,
	2017			2016			2015
Valuation Assumptions:
Expected volatility		37.9	%		44.0	%		41.2	%
Risk-free interest rate		1.9	%		1.3	%		1.4	%
Expected dividends (per share)	$	—		$	—		$	—
Expected term (in years)		4.5			4.5			4.5

The following table summarizes award activity for stock options:

Stock Options	Shares (in thousands)			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value (in millions)

Outstanding as of December 31, 2016		4,853		$	26.83
Granted		915			20.64
Forfeited		(102	)		23.23
Exercised		(36	)		14.19
Outstanding as of December 31, 2017		5,630		$	25.97		4.9	$	—
Exercisable at December 31, 2017		3,964		$	29.16		4.5	$	—

The weighted-average grant-date fair value of options granted for the years ended December 31, 2017 and 2016 was $7.07 and $5.29, respectively. The total intrinsic value of options exercised for the years ended December 31, 2017, 2016, and 2015 was less than $1 million. As of December 31, 2017, unrecognized compensation cost related to stock option awards was approximately $7 million, which is expected to be recognized over a weighted average period of 1.6 years. Cash received from exercises of stock options was approximately $1 million for the year ended December 31, 2017.

Restricted Stock Awards and Restricted Stock Units (“RSAs and RSUs”)

Restricted stock generally cliff vests after 1, 3, 4 or 6 years. The grant-date fair value of restricted stock grants is determined using the closing quoted market price on the grant date. Additionally, the Company’s restricted stock agreements provide for full vesting of restricted stock in the event of a change of control of the Company and a change in the holder’s responsibilities following a change in control of the Company.

The following table summarizes award activity for restricted stock awards and restricted stock units:

RSAs / RSUs	Shares (in thousands)			Weighted- Average Grant-Date Fair Value

Nonvested as of December 31, 2016		2,311		$	27.66
Granted		580			15.87
Vested⁽¹⁾		(808	)		22.34
Forfeited		(405	)		28.28
Nonvested as of December 31, 2017		1,678		$	25.99

⁽¹⁾

251 thousand shares were withheld and retired from the vesting of shares to employees to satisfy minimum tax withholding.

The weighted average grant-date fair value was $15.87, $14.71, and $22.59 for RSA and RSU granted for the years ended December 31, 2017, 2016, and 2015, respectively. As of December 31, 2017, unrecognized compensation cost related to RSAs and RSUs was $16 million, which is expected to be recognized over a weighted average period of 1.9 years. The total vest-date fair value of shares vested for the years ended December 31, 2017, 2016, and 2015 was $12 million, $6 million, and $4 million, respectively.

Performance Stock Awards (“PSAs”)

Performance stock awards generally have a 3-year vesting period from the grant date and vest at the end of the vesting period. The grant-date fair value of market-condition performance stock grants is determined using a Monte Carlo simulation probabilistic model. The grant-date fair value of performance-condition performance stock grants is determined using the closing quoted market price on the grant date. Additionally, the Company’s performance award agreements provide for full vesting of performance awards in the event of a change of control of the Company and a change in the holder’s responsibilities following a change in control of the Company.

For the year ended December 31, 2017, the Company granted PSAs to senior management employees with potential payouts varying from zero to 169,346 shares. The PSAs can be earned over a three-year performance period, based on three equal, independent parts that are subject to three separate performance metrics: (i) one-third of the PSAs have a Total Shareholder Return (TSR) metric (market-condition), (ii) one-third of the PSAs have an EBITDA metric (performance-condition), and (iii) one-third of the PSAs have a Working Capital (WC) metric (performance-condition).

Performance against the TSR metric is determined by comparing the performance of the Company’s TSR with the TSR performance of designated peer companies for the three year performance period. Performance against the EBITDA metric is determined by comparing the performance of the Company’s actual EBITDA average for each of the three-years of the performance period against the EBITDA metrics set by the Company’s Compensation Committee of the Board of Directors. Performance against the WC metric is determined by comparing the performance of the Company’s actual WC average for each of the three-years of the performance period against the WC metrics set by the Company’s Compensation Committee of the Board of Directors.

The following table summarizes award activity for performance stock awards:

PSAs	Shares (in thousands)		Weighted- Average Grant-Date Fair Value

Nonvested as of December 31, 2016		233	$	18.81
Granted		84		22.75
Vested		—		—
Forfeited		—		—
Nonvested as of December 31, 2017		317	$	19.86

The weighted- average grant-date fair value of PSAs granted for the years 2017 and 2016 was $22.75 and $16.47, respectively. As of December 31, 2017, unrecognized compensation cost related to PSAs was $2 million, which is expected to be recognized over a weighted average period of 1.2 years.