STOCK-BASED COMPENSATION

In July 2017, we adopted the BHGE 2017 Long-Term Incentive Plan (LTI Plan) under which we may grant stock options and other equity-based awards to employees and non-employee directors providing services to the Company and our subsidiaries. A total of up to 57.4 million shares of Class A common stock are authorized for issuance pursuant to awards granted under the LTI Plan over its term which expires on the date of the annual meeting of the Company in 2027. A total of 46.2 million shares of Class A common stock are available for issuance as of December 31, 2018.

Stock-based compensation cost was $121 million and $37 million in 2018 and 2017, respectively. Stock-based compensation cost is measured at the date of grant based on the calculated fair value of the award and is generally recognized on a straight-line basis over the vesting period of the equity grant. The compensation cost is determined based on awards ultimately expected to vest; therefore, we have reduced the cost for estimated forfeitures based on historical forfeiture rates. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods to reflect actual forfeitures. There were no stock-based compensation costs capitalized as the amounts were not material.

Stock Options

We may grant stock options to our officers, directors and key employees. Stock options generally vest in equal amounts over a three-year vesting period provided that the employee has remained continuously employed by the Company through such vesting date. The fair value of each stock option granted is estimated using the Black-Scholes option pricing model. The following table presents the weighted average assumptions used in the option pricing model for options granted under the LTI Plan. The expected life of the options represents the period of time the options are expected to be outstanding. The expected life is based on a simple average of the vesting term and original contractual term of the awards. The expected volatility is based on the historical volatility of our five main competitors over a six year period. The risk-free interest rate is based on the observed U.S. Treasury yield curve in effect at the time the options were granted. The dividend yield is based on a five year history of dividend payouts in Baker Hughes.



	2018			2017
Expected life (years)	6			6
Risk-free interest rate	2.5		%	2.1		%
Volatility	33.7		%	36.4		%
Dividend yield	2		%	1.2		%
Weighted average fair value per share at grant date	$	10.34		$	12.32

The following table presents the changes in stock options outstanding and related information (in thousands, except per option prices):



	Number of Options		Weighted Average Exercise Price Per Option
Outstanding at December 31, 2017	7,841		$	35.59
Granted	1,248		35.53
Exercised	(683	)	25.59
Forfeited	(184	)	36.59
Expired	(684	)	54.41
Outstanding at December 31, 2018	7,538		$	34.76
Exercisable at December 31, 2018	5,389		$	34.27

The weighted average remaining contractual term for options outstanding and options exercisable at December 31, 2018 were 4.7 years and three years, respectively. The maximum contractual term of options outstanding is 9.6 years.

There were 505 thousand options that vested in 2018. As of December 31, 2018, there was $18 million of total unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted average period of 1.8 years.

The total intrinsic value of stock options (defined as the amount by which the market price of our common stock on the date of exercise exceeds the exercise price of the option) exercised in 2018 was $6 million. There is no income tax benefit realized from stock options exercised in 2018.

The total intrinsic value of stock options outstanding at December 31, 2018 was $1 million, all of which relates to options vested and exercisable. The intrinsic value of stock options outstanding is calculated as the amount by which the quoted price of $21.50 of our common stock as of the end of 2018 exceeds the exercise price of the options.

Restricted Stock

In addition to stock options, our officers, directors and key employees may be granted restricted stock awards (RSA), which is an award of common stock with no exercise price, or restricted stock units (RSU), where each unit represents the right to receive, at the end of a stipulated period, one unrestricted share of stock with no exercise price. Certain RSAs and RSUs are subject to cliff or graded vesting, generally ranging over a three year period, or over a one year period for non-employee directors. Cash dividend equivalents are accrued on RSUs and are payable upon vesting of the awards. We determine the fair value of restricted stock awards and restricted stock units based on the market price of our common stock on the date of grant, discounted by the present value of future dividends.

The following table presents the changes of RSUs and related information (in thousands, except per unit prices):



	Number of Units		Weighted Average Grant Date Fair Value Per Unit
Unvested balance at December 31, 2017	3,286		$	38.01
Granted	5,269		35.47
Vested	(1,212	)	37.45
Forfeited	(462	)	35.12
Unvested balance at December 31, 2018	6,882		$	36.18

In 2018, the total intrinsic value of RSUs vested (defined as the market value of shares awarded at vesting date) was $41 million and unvested RSUs was $148 million. The total fair value of RSUs vested in 2018 was $45 million. As of December 31, 2018, there was $166 million of total unrecognized compensation cost related to unvested RSUs, which is expected to be recognized over a weighted average period of 1.9 years.

Performance Share Units

During 2018, we initiated a new plan where we grant performance share units (PSUs) to certain officers and key employees. The PSUs are stock-based awards tied to predefined company metrics which determine the number of units to be received. PSUs generally cliff vest after a three-year service period. Cash dividend equivalents are accrued on PSUs and are payable upon vesting of the awards. The fair value of the awards are based on the market price of our common stock on the date of grant. During 2018, we granted 952 thousand PSUs at a weighted average grant date fair value of $35.13. At December 31, 2018, we had 927 thousand PSUs unvested and outstanding.

The total intrinsic value of PSUs (defined as the value of the shares awarded at the year end market price) outstanding was $20 million as of December 31, 2018. Total unrecognized compensation cost related to unvested PSUs, which is expected to be recognized over a weighted average period of 2.2 years, was $23 million as of December 31, 2018.