Stock Plans and Share-Based Compensation

Under CSX's share-based compensation plans, awards primarily consist of performance grants, restricted stock awards, restricted stock units, stock options and stock grants for directors. Awards granted under the various programs are determined and approved by the Compensation Committee of the Board of Directors or, in certain circumstances, by the Chief Executive Officer for awards to management employees other than senior executives. The Board of Directors approves awards granted to the Company’s non-management directors upon recommendation of the Governance Committee.

The Compensation-Stock Compensation Topic in the ASC requires the cash flows resulting from income tax deductions in excess of compensation costs to be classified as financing cash flows. This requirement resulted in reduced net operating cash flows and increased net financing cash flows of approximately $35 million, $38 million and $12 million for fiscal years 2011, 2010 and 2009, respectively.

The Compensation-Stock Compensation Topic also requires the disclosure of total compensation costs for share-based payment arrangements and the related tax benefits recognized in income. Share-based compensation expense is measured at the fair market value of the Company’s stock on the grant date and is recognized on a straight-line basis over the service period of the respective award. Total pre-tax expense associated with share-based compensation and its related income tax benefit is as follows:



	Fiscal Years
(Dollars in Millions)	2011		2010		2009
Share-Based Compensation Expense	$	30	$	62	$	17
Income Tax Benefit	$	11	$	24	$	6

Stock Options

Stock options have not been granted since 2003. As of December 2011, there were 413 current or former employees with stock options outstanding under the CSX Omnibus Incentive Plan (the “Omnibus Plan”). Outstanding stock options were granted with 10-year terms and all are fully vested and exercisable; therefore, there is no current or future expense related to these options. The exercise price for options granted equals the market price of the underlying stock on the grant date. A summary of CSX's stock option activity and related information for the fiscal years 2011, 2010 and 2009 is as follows:



	Fiscal Years
	2011				2010				2009
	Options Outstanding (Thousands)		Weighted- Average Exercise Price		Options Outstanding (Thousands)		Weighted- Average Exercise Price		Options Outstanding (Thousands)		Weighted- Average Exercise Price
Outstanding & Exercisable at Beginning of Year	9,111		$	5.82	16,233		$	5.87	21,975		$	5.98
Expired or Cancelled	(27	)	$	6.44	(6	)	$	6.10	(282	)	$	7.42
Exercised	(4,939	)	$	5.96	(7,116	)	$	5.93	(5,460	)	$	6.23

Outstanding & Exercisable at End of Year	4,145		$	5.64	9,111		$	5.82	16,233		$	5.87

NOTE 4. Stock Plans and Share-Based Compensation, continued

The following table summarizes information about stock options outstanding at December 2011:



					Number Outstanding	Weighted- Average Remaining Contractual	Weighted- Average Exercise		Aggregate Intrinsic Value
Exercise Price					(Thousands)	Life (Years)	Price		(Millions)
$	5	to	$	10	4,145	1.0	$	5.64	$	64

The aggregate intrinsic value represents the amount employees would have received if the options were exercised as of December 30, 2011 at a closing market price of $21.06. The total intrinsic value of options exercised for fiscal years ended 2011, 2010, and 2009 was $84 million, $88 million, and $41 million, respectively. This value represents the value realized by current and former employees who exercised options.

Restricted Stock Awards

Restricted stock awards, excluding restricted stock units, generally vest over an employment period of up to five years. The following table provides information about outstanding restricted stock awards. As of December 2011, unrecognized compensation expense for these awards was approximately $14 million, which will be expensed over an average remaining period of two years.



	Fiscal Years
	2011		2010		2009
Number of Restricted Stock Awards Outstanding (Thousands)^(a)	1,572		1,173		807
Weighted-Average Fair Value at Grant Date	$	16.91	$	13.67	$	11.06
Restricted Stock Award Expense (Millions)^(a)	7		4		2
Number of Unvested Restricted Stock Awards Outstanding (Thousands)	678		702		612
Weighted-Average Fair Value of Unvested Awards Outstanding	$	20.93	$	14.69	$	11.19

(a) Time-based restricted stock units were granted to key members of management under the respective Long-term Incentive Plans in the amount of 361,000 , 402,000, and 658,000 in 2011, 2010, and 2009, respectively, as described below. These units vest over three years, therefore only a partial amount of expense was recognized in 2011, 2010, and 2009, respectively.

Long-term Incentive Plans

The CSX Long-term Incentive Plans (“LTIP”) were adopted under either the Omnibus Plan or the 2011 CSX Stock and Incentive Award Plan. The Omnibus Plan expired pursuant to its terms in April 2010, and as such no new awards will be granted under this plan. The objective of these long-term incentive plans is to motivate and reward key members of management and executives for achieving and exceeding certain financial and strategic initiatives.

NOTE 4. Stock Plans and Share-Based Compensation, continued

In May of 2009, 2010 and 2011, target performance units were granted to key members of management under three separate LTIP plans covering three-year cycles: the 2009-2011 (“2011 LTIP”), 2010-2012 (“2012 LTIP”) and 2011-2013 (“2013 LTIP”) plans (collectively, the “Plans”). The key financial target for all three plans is consolidated operating ratio, which is defined as annual operating expenses divided by revenue, and excludes certain non-recurring items. The target grants were made in performance units, with each unit being equivalent to one share of CSX stock, and payouts will be made in CSX common stock. Payouts to certain senior executive officers are subject to a reduction of up to 30% at the discretion of the Compensation Committee of the Board of Directors based upon Company performance against certain CSX strategic initiatives. Total expense incurred due to long-term incentive plans was $21 million, $56 million and $13 million for fiscal years 2011, 2010 and 2009, respectively.

The 2011 plan ended on December 30, 2011, and CSX issued 2.7 million net shares in January 2012 as a result of the achievement of applicable performance targets for the three preceding fiscal years.

As part of the 2012 and 2013 plans, 402 thousand and 361 thousand time-based restricted stock units, respectively, were granted. The restricted stock units vest three years after the date of grant and participants receive cash dividend equivalents on the unvested shares during the restriction period. These awards are not based upon CSX’s attainment of operational targets. The restricted stock units and expenses are included in the information as shown in the table above.



	LTIP Plan (Plan Ended In)
	2011		2012		2013
Number of target units outstanding (Thousands)^(a)	1,966		1,224		1,097
Weighted-average fair value at grant date ^(a)	$	11.09	$	18.14	$	25.92
Payout Range	0% - 233%		0% - 200%		0% - 200%

(a) Number of target units granted and weighted-average fair value calculations above include the value of both initial grants and subsequent, smaller grants issued at different prices based on grant date fair value to new or promoted employees not previously included.

As of December 2011, there was $17 million of total unrecognized compensation cost related to these plans that is expected to be recognized over a weighted-average period of approximately 1.5 years. The activity related to each of the outstanding long-term incentive plans is summarized as follows:



	LTIP Plan (Plan Ended In)
	2011		2012		2013
(Units in Thousands)	Units Outstanding						Weighted-Average Fair Value at Grant Date
Unvested at December 25, 2009	1,788		—		—		$	10.50
Granted in 2010	158		1,235		—		16.89
Forfeited in 2010	(4	)	(52	)	—		17.31
Unvested at December 31, 2010	1,942		1,183		—		14.43

Granted in 2011	25		41		1,111		24.69
Forfeited in 2011	—		—		(14	)	23.93
Vested at December 30, 2011	1,966		—		—		11.09
Unvested at December 30, 2011	—		1,224		1,097		$	22.03

NOTE 4. Stock Plans and Share-Based Compensation, continued

Stock Awards for Directors

CSX’s non-management directors receive an annual retainer of $75,000 to be paid quarterly in cash, unless the director chooses to receive the retainer in the form of CSX common stock. Additionally, non-management directors receive an annual grant of common stock in the amount of $150,000, with the number of shares to be granted based on the average closing price of CSX stock in the months of November, December and January. The following table provides information about shares issued to directors.



	Fiscal Years
	2011		2010		2009
Shares Issued to Directors (Thousands)	93		114		222
Expense (Millions)	$	2	$	2	$	2
Weighted Average Grant Date Stock Price	$	23.46	$	15.16	$	10.30

The directors may elect to defer receipt of their fees, in accordance with Internal Revenue Code Section 409A. Deferred cash amounts were credited to an account and invested in a choice of eight investment selections, including a CSX common stock equivalent fund. Distributions were made in accordance with elections made by the directors, consistent with the terms of the Plan. At December 2011, there were approximately 3 million shares of common stock reserved for issuance under this Plan.

Shareholder Dividend Reinvestment Plan

CSX maintains the Shareholder Dividend Reinvestment Plan under which shareholders may use dividends paid on CSX common stock held in the plan to purchase additional shares of stock. The following table provides information about shares available for issuance under this plan at the end of fiscal years 2011, 2010 and 2009.



	Fiscal Years
	2011	2010	2009
Number of Shares Available for Issuance (Thousands)	38,548	39,250	39,804