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 $13 million, $37 million and $35 million for fiscal years 2013, 2012 and 2011, 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)	2013		2012		2011
Share-Based Compensation Expense	$	14	$	14	$	30
Income Tax Benefit	6		5		11

Stock Options

Stock options have not been granted since 2003. As of December 2013, there were no current or former employees with stock options outstanding, as all remaining stock options expired in May 2013. The exercise price for options granted equals the market price of the underlying stock on the grant date. The total intrinsic value of options exercised for fiscal years ended 2013, 2012, and 2011 was $27 million, $37 million, and $84 million, respectively. This value represents the value realized by current and former employees who exercised options.

A summary of CSX's stock option activity and related information for the fiscal years 2013, 2012 and 2011 is as follows:



	Fiscal Years
	2013				2012				2011
	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	1,672		$	5.36	4,145		$	5.64	9,111		$	5.82
Expired or Cancelled	(9	)	5.36		(15	)	6.36		(27	)	6.44
Exercised	(1,663	)	5.36		(2,458	)	5.83		(4,939	)	5.96

Outstanding & Exercisable at End of Year	—		$	—	1,672		$	5.36	4,145		$	5.64

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

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 2013, unrecognized compensation expense for these awards and units was approximately $17 million, which will be expensed over a weighted-average remaining period of 2 years.



	Fiscal Years
	2013		2012		2011
Restricted Stock Units and Awards Outstanding (Thousands)^(a)	1,462		1,353		1,572
Weighted-Average Fair Value at Grant Date	$	23.89	$	21.38	$	16.91
Restricted Stock Units and Awards Expense (Millions)^(a)	10		9		7
Unvested Restricted Stock Units and Awards Outstanding (Thousands)	705		629		678
Weighted-Average Fair Value of Unvested Units and Awards Outstanding	$	24.17	$	22.48	$	20.93

(a) Time-based restricted stock units were granted to certain employees under the respective Long-term Incentive Plans in the amount of 524,000, 433,000, and 361,000 in 2013, 2012, and 2011, respectively, as described below. These units vest over three years, therefore only a partial amount of expense was recognized in 2013, 2012, and 2011, respectively.

Long-term Incentive Plans

The CSX Long-term Incentive Plans (“LTIP”) were adopted under the 2010 CSX Stock and Incentive Award Plan. The objective of these long-term incentive plans is to motivate and reward certain employees for achieving and exceeding certain financial and strategic initiatives.

In May of 2011, 2012 and 2013, target performance units were granted to certain employees under three separate LTIP plans covering three-year cycles: the 2011-2013 (“2013 LTIP”), 2012-2014 (“2014 LTIP”) and 2013-2015 (“2015 LTIP”) plans (collectively, the “Plans”). The key financial target for the 2013 and 2014 plans is based solely on operating ratio (operating expense divided by operating revenue) and excludes certain non-recurring items as disclosed in the Company's financial statements. The key financial targets for the 2015 plan will be based on the achievement of goals related to both operating ratio and return on assets (tax-adjusted operating income divided by net property) excluding non-recurring items as disclosed in the Company's financial statements. The three-year average operating ratio and return on assets over the performance period will each comprise 50% of the payout and are measured independently of the other.

Grants were made in performance units, with each unit being equivalent to one share of CSX common stock, and payouts will be made in CSX common stock. The payout range for participants will be between 0% and 200% of the target awards depending on Company performance against predetermined goals for each three-year cycle. The 2013 and 2014 plans provides that payouts for certain executive officers are subject to downward adjustment by up to 30% based upon Company performance against certain CSX strategic initiatives. The 2015 plan states that payouts for certain executive officers are subject to downward adjustment by up to 30% based upon total shareholder return relative to specified comparable groups. Total expense incurred due to long-term incentive plans was $2 million, $3 million and $21 million for fiscal years 2013, 2012 and 2011, respectively.

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

The 2013 plan ended on December 27, 2013, and CSX did not issue any shares in January 2014 as applicable performance targets for the three preceding fiscal years were not met.



	LTIP Plan (Plan Ended In)
	2013		2014		2015
Number of target units outstanding (Thousands)^(a)	1,080		1,340		1,318
Weighted-average fair value at grant date ^(a)	$	25.63	$	22.13	$	25.32
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.

Restricted Stock Units

As part of the 2013, 2014 and 2015 plans, 361 thousand, 433 thousand and 524 thousand restricted stock units, respectively, were granted. The restricted stock units vest three years after the date of grant. Participants receive cash dividend equivalents on the unvested shares during the restriction period. These awards are time-based and are not based upon CSX’s attainment of operational targets. The restricted stock units and expenses are included in the information as shown within the Restricted Stock Grants section above.

As of December 2013, there was $29 million of total unrecognized compensation cost related to these plans that is expected to be recognized over a weighted-average period of approximately 2 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)	2013		2014		2015		Weighted-Average Fair Value at Grant Date
Unvested at December 30, 2011	991		—		—		$	25.92
Granted in 2012	65		1,325		—		21.97
Forfeited in 2012	(2	)	(69	)	—		(21.99		)
Unvested at December 28, 2012	1,054		1,256		—		23.66

Granted in 2013	26		85		1,354		25.24
Forfeited in 2013	—		(1	)	(36	)	(25.31		)
Cancelled due to performance conditions^(a)	(1,080	)	—		—		25.63
Vested at December 27, 2013	—		—		—		—
Unvested at December 27, 2013	—		1,340		1,318		$	23.73

(a) The minimum financial target was not met in 2013. As a result, there was no performance unit payout for the LTIP ended December 27, 2013.

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 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
	2013		2012		2011
Shares Issued to Directors (Thousands)	105		102		93
Expense (Millions)	$	2	$	2	$	2
Weighted Average Grant Date Stock Price	$	23.12	$	21.92	$	23.46

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.