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 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 $3 million, $13 million and $37 million for fiscal years 2014, 2013 and 2012, 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:

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



	Fiscal Years
(Dollars in Millions)	2014		2013		2012
Share-Based Compensation Expense	$	33	$	14	$	14
Income Tax Benefit	13		6		5

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 2014, unrecognized compensation expense for these awards and units was approximately $16 million, which will be expensed over a weighted-average remaining period of 2 years.



	Fiscal Years
	2014		2013		2012
Restricted Stock Units and Awards Outstanding (Thousands)^(a)	1,383		1,462		1,353
Weighted-Average Fair Value at Grant Date	$	25.03	$	23.89	$	21.38
Restricted Stock Units and Awards Expense (Millions)^(a)	11		10		9
Unvested Restricted Stock Units and Awards Outstanding (Thousands)	601		705		629
Weighted-Average Fair Value of Unvested Units and Awards Outstanding	$	26.40	$	24.17	$	22.48

(a) Time-based restricted stock units were granted to certain employees under the respective Long-term Incentive Plans in the amount of 371,000, 524,000, and 433,000 in 2014, 2013 and 2012, respectively, as described below. These units vest over three years, therefore only a partial amount of expense was recognized in 2014, 2013, and 2012, 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. 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. In May of 2012, 2013 and 2014, target performance units were granted to certain employees under three separate LTIP plans covering three-year cycles: the 2012-2014 (“2014 LTIP”), 2013-2015 (“2015 LTIP”) and 2014-2016 (“2016 LTIP”) plans (collectively, the “Plans”).

The key financial target for the 2014 LTIP plan 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 2014 LTIP plan 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 2014 LTIP plan ended on December 26, 2014, and CSX did not issue any shares in January 2015 as applicable performance targets for the three preceding fiscal years were not met.

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

The key financial targets for the 2015 and 2016 LTIP plans 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. The 2015 and 2016 LTIP plans state 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 $19 million, $2 million and $3 million for fiscal years 2014, 2013 and 2012, respectively.



	LTIP Plan (Plan Ended In)
	2014		2015		2016
Number of target units outstanding (Thousands)^(a)	1,338		1,330		1,119
Weighted-average fair value at grant date ^(a)	$	22.23	$	25.50	$	28.03
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 2014, 2015 and 2016 LTIP plans, 433 thousand, 524 thousand and 371 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 2014, there was $39 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)	2014		2015		2016		Weighted-Average Fair Value at Grant Date
Unvested at December 28, 2012	1,237		—		—		$	21.98
Granted in 2013	85		1,354		—		25.26
Forfeited in 2013	(4	)	(75	)	—		(25.19		)
Unvested at December 27, 2013	1,318		1,279		—		23.70

Granted in 2014	20		52		1,144		28.13
Forfeited in 2014	—		(1	)	(25	)	(28.07		)
Cancelled due to performance conditions^(a)	(1,338	)	—		—		(22.23		)
Vested at December 26, 2014	—		—		—		—
Unvested at December 26, 2014	—		1,330		1,119		$	26.66

(a) The minimum financial target was not met in 2014. As a result, there was no performance unit payout for the LTIP ended December 26, 2014.

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
	2014		2013		2012
Shares Issued to Directors (Thousands)	79		105		102
Expense (Millions)	$	2	$	2	$	2
Weighted Average Grant Date Stock Price	$	28.01	$	23.12	$	21.92

The directors may elect to defer receipt of their fees, in accordance with Internal Revenue Code ("IRC") 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.