NOTE 10 STOCK COMPENSATION

General

Prior to the Spin-off, our employees participated in Occidental’s stock-based incentive plans under which, if they were eligible, they received Occidental stock awards. Effective on the Spin-off date of November 30, 2014, our employees and non-employee directors began participating in our long-term incentive plan. In connection with the Spin-off, unvested share-based compensation awards granted to our employees under Occidental’s stock-based incentive plans and held by grantees as of November 30, 2014 were replaced with substitute awards based on CRC common shares. These substitute awards were intended to generally preserve the value of the original Occidental award determined as of November 30, 2014. Original and remaining vesting periods of Occidental awards were unaffected by the substitution. There were approximately 650 employees affected by the substitution of awards. The substitution of awards did not cause us to recognize incremental compensation expense. These substitute awards reduced the maximum number of shares of our common stock available for grant under our incentive plan.

In May 2016, our PSU and certain RSU awards that were originally granted as cash-settled awards were converted to stock-settled awards when our stockholders approved additional shares for grant under our long-term incentive plan at the 2016 annual stockholder meeting. Less than 50 people were impacted by this modification, which resulted in no incremental compensation cost.

Compensation expense for stock-based awards for the year ended December 31, 2016, 2015 and 2014 was approximately $33 million, $34 million and $27 million, respectively. Prior to the Spin-off, Occidental allocated certain costs to us that included compensation costs for stock-based awards of Occidental stock. Using the same allocation method for all allocated costs used by Occidental, we estimated the stock compensation expense allocated to us was approximately $26 million for January 1, 2014 through November 30, 2014.

For the years ended December 31, 2016 and December 31, 2015, we recognized income tax expense of $0 and approximately $2 million and made cash payments of $5 million and $10 million for the cash-settled portion of our awards, respectively. As the stock compensation expenses prior to the Spin-off costs were allocated to us, it was not practical to calculate the tax expense/benefit or cash payments for those years.

As of December 31, 2016, unrecognized compensation expense for all our unvested stock-based incentive awards, based on the year-end value of our common stock, was $51 million. This expense is expected to be recognized over a weighted-average period of two years.

The maximum number of authorized shares of our common stock that may be issued pursuant to our long-term incentive plan is 4.7 million shares.

Restricted Stock

Certain employees are granted RSUs or restricted stock awards which are in the form of, or equivalent in value to, actual shares of our common stock. Depending on their terms, RSUs are service- or performance-based and are settled in cash or stock at the time of vesting. The service-based awards vest ratably over three years, or at the end of two or three years, following the date of grant. The performance-based awards vest after two or three years from the grant date if the performance targets are met.

During 2016 and 2015, non-employee directors were granted RSUs representing approximately 76,788 shares and 15,375 shares, respectively, which fully vest and convert into shares one year from the date of grant.

The following summarizes our RSU activity for the year ended December 31, 2016:

	Stock-Settled				Cash-Settled
	Number of Shares (in thousands)		Weighted-Average Grant- Date Fair Value		Number of Shares (in thousands)
Unvested at January 1	132		$	79.39	904
Granted	453		$	15.40	1,273
Vested	(121	)	$	62.04	(344	)
Forfeited	(24	)	$	52.66	(88	)
Converted to stock-settled awards	165		$	18.50	(165	)

Unvested at December 31	605		$	22.08	1,580

Performance Stock Unit Awards

Certain executives were awarded PSU awards that vest at the end of a three-year period following the grant date if performance targets are met. A summary of our unvested PSU awards as of December 31, 2016, and changes during the year ended December 31, 2016, is presented below:

	Stock-Settled				Cash-Settled
	Number of Shares (in thousands)		Weighted-Average Grant-Date Fair Value		Number of Shares (in thousands)
Unvested at January 1	322		$	77.80	279
Granted	—		$	—	—
Vested	(118	)	$	77.26	—
Forfeited	(21	)	$	51.40	(3	)
Converted to stock-settled awards	276		$	18.50	(276	)

Unvested at December 31	459		$	44.34	—

The modification and grant date assumptions used in the Monte Carlo valuation for the TSR-based portion of the outstanding PSU awards are as follows:

	Modification Date			Grant Date
Risk-free interest rate	0.77		%	1.06		%
Dividend yield	—		%	0.95		%
Volatility factor	69.69		%	43.63		%
Expected life (years)	2.16			2.9
Fair value of underlying common stock	$	18.50		$	42.00

Stock Options

We granted stock options to certain executives under our long-term incentive plan. The options permit purchase of our common stock at exercise prices no less than the fair market value of the stock on the date the options were granted. The options have terms of seven years and vest ratably over three years, with one third of the granted shares becoming exercisable on each anniversary date following the date of grant.

The following table summarizes our option activity during the year ended December 31, 2016:

	Options (000’s)		Weighted-Average Exercise Price		Weighted-Average Grant-Date Fair Value		Aggregate Intrinsic Value
Beginning balance, January 1	1,152		$	70.21	$	18.46	$	—
Granted	—		$	—	$	—	$	—
Exercised	—		$	—	$	—	$	—
Forfeited	(43	)	$	78.37	$	19.46	$	—
Expired or Canceled	—		$	—	$	—	$	—

Ending balance, December 31	1,109		$	69.89	$	18.42	$	—

Exercisable at December 31	669		$	73.61	$	18.88	$	—

The grant date assumptions used in the Black-Scholes valuation for options granted during 2015 and 2014 were as follows:

	2015			2014
Exercise price per share	$	42.00		$	81.10
Expected life (in years)	4.5			4.5
Expected volatility	44.7		%	35.4		%
Risk-free interest rate	1.56		%	1.40		%
Dividend yield	0.95		%	.50		%
Grant date fair value of stock option awards granted	$	15.00		$	19.80

Employee Stock Purchase Plan

Effective January 1, 2015, we adopted the California Resources Corporation 2014 Employee Stock Purchase Plan (ESPP). The ESPP provides our employees the ability to purchase shares of our common stock at a price equal to 85% of the closing price of a share of our common stock as of the first or last day of each offering period (a fiscal quarter), whichever amount is less.

The maximum number of shares of our common stock that may be issued pursuant to the ESPP is subject to certain annual limits and has a cumulative limit of one million shares, subject to adjustment pursuant to the terms of the ESPP. For the year ended December 31, 2016, we issued approximately 0.3 million shares of common stock in connection with the ESPP. As of January 1, 2017, over one quarter of our employees had elected to participate in the plan.