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 $37 million, $35 million and $38 million for fiscal years 2012, 2011 and 2010, 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)	2012		2011		2010
Share-Based Compensation Expense	$	14	$	30	$	62
Income Tax Benefit	$	5	$	11	$	24

Stock Options

Stock options have not been granted since 2003. As of December 2012, there were 270 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 2012, 2011 and 2010 is as follows:



	Fiscal Years
	2012				2011				2010
	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	4,145		$	5.64	9,111		$	5.82	16,233		$	5.87
Expired or Cancelled	(15	)	$	6.36	(27	)	$	6.44	(6	)	$	6.10
Exercised	(2,458	)	$	5.83	(4,939	)	$	5.96	(7,116	)	$	5.93

Outstanding & Exercisable at End of Year	1,672		$	5.36	4,145		$	5.64	9,111		$	5.82

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

The following table summarizes information about stock options outstanding at December 2012:



					Number Outstanding	Weighted- Average Remaining Contractual	Weighted- Average Exercise		Aggregate Intrinsic Value
Exercise Price					(Thousands)	Life	Price		(Millions)
$	5	to	$	10	1,672	4 months	$	5.36	$	24

The aggregate intrinsic value represents the amount employees would have received if the options were exercised as of December 28, 2012 at a closing market price of $19.43. The total intrinsic value of options exercised for fiscal years ended 2012, 2011, and 2010 was $37 million, $84 million, and $88 million, respectively. This value represents the value realized by current and former employees who exercised options.

Restricted Stock Grants

Restricted stock grants consist of units and awards. Restricted stock units are granted as part of the Company's long-term incentive plan, with each unit being equivalent to one share of CSX stock and vest over three years. Restricted stock awards generally vest over an employment period of up to five years. The following table provides information about outstanding restricted stock units and awards combined. As of December 2012, unrecognized compensation expense for these awards and units was approximately $14 million, which will be expensed over a weighted-average remaining period of two years.



	Fiscal Years
	2012		2011		2010
Restricted Stock Units and Awards Outstanding (Thousands)^(a)	1,353		1,572		1,173
Weighted-Average Fair Value at Grant Date	$	21.38	$	16.91	$	13.67
Restricted Stock Units and Awards Expense (Millions)^(a)	9		7		4
Unvested Restricted Stock Units and Awards Outstanding (Thousands)	629		678		702
Weighted-Average Fair Value of Unvested Units and Awards Outstanding	$	22.48	$	20.93	$	14.69

(a) Time-based restricted stock units were granted to key members of management and executives under the respective Long-term Incentive Plans in the amount of 433,000, 361,000, and 402,000 in 2012, 2011, and 2010, respectively, as described below. These units vest over three years, therefore only a partial amount of expense was recognized in 2012, 2011, and 2010, respectively.

Long-term Incentive Plans

The CSX Long-term Incentive Plans (“LTIP”) were adopted under either the Omnibus Plan or the 2010 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 2010, 2011 and 2012, target performance units were granted to key members of management and executives under three separate LTIP plans covering three-year cycles: the 2010-2012 (“2012 LTIP”), 2011-2013 (“2013 LTIP”) and 2012-2014 (“2014 LTIP”) plans (collectively, the “Plans”). The key financial target for all three plans is 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 $3 million, $21 million and $56 million for fiscal years 2012, 2011 and 2010, respectively.

The 2012 plan ended on December 28, 2012, and CSX issued 189 thousand net shares in January 2013 as a result of the achievement of applicable performance targets for the three preceding fiscal years.

As part of the 2013 and 2014 plans, 361 thousand and 433 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)
	2012		2013		2014
Number of target units outstanding (Thousands)^(a)	1,182		1,079		1,311
Weighted-average fair value at grant date ^(a)	$	18.27	$	25.67	$	21.98
Payout Range	0% - 200%		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.

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

As of December 2012, there was $22 million of total unrecognized compensation cost related to these plans that is expected to be recognized over a weighted-average period of approximately two years. The activity related to each of the outstanding long-term incentive plans is summarized as follows:



	LTIP Plan (Plan Ended In)					Weighted-Average Fair Value at Grant Date
(Units Outstanding, in Thousands)	2012	2013		2014		Weighted-Average Fair Value at Grant Date
Unvested at December 31, 2010	1,103	—		—		$	17.94
Granted in 2011	41	1,111		—		25.02
Forfeited in 2011	—	(97	)	—		(25.71		)
Unvested at December 30, 2011	1,144	1,014		—		22.05

Granted in 2012	38	65		1,325		21.80
Forfeited in 2012	—	—		(14	)	(22.08		)
Vested at December 28, 2012	1,182	—		—		18.27
Unvested at December 28, 2012	—	1,079		1,311		$	23.84

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 approximately $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
	2012		2011		2010
Shares Issued to Directors (Thousands)	102		93		114
Expense (Millions)	$	2	$	2	$	2
Weighted Average Grant Date Stock Price	$	21.92	$	23.46	$	15.16

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 are made in accordance with elections made by the directors, consistent with the terms of the Directors' Deferred Compensation Plan.

Shareholder Dividend Reinvestment Plan

In 2012, CSX transitioned the Shareholder Dividend Reinvestment Plan to a bank-sponsored plan. Shareholders may continue to use dividends paid on CSX common stock held in the plan to purchase additional shares of stock; however, CSX is no longer required to reserve shares for issuance under this plan.