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 $4 million, $3 million and $13 million for fiscal years 2015, 2014 and 2013, respectively.

It 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 shown in the table below.



	Fiscal Years
(Dollars in Millions)	2015		2014		2013
Share-Based Compensation Expense	$	12	$	33	$	14
Income Tax Benefit	4		13		6

Stock Options

During fourth quarter 2015, the Company granted 2.5 million in stock options to certain members of management. The fair value of stock options on the date of grant was $5.31 which was estimated using the Black-Scholes valuation model. Stock options have been granted with 10-year terms and vest three years after the date of grant. The exercise price for options granted equals the closing market price of the underlying stock on the date of grant.

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 2015, unrecognized compensation expense for these awards and units was approximately $13 million, which will be expensed over a weighted-average remaining period of 2 years.

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



	Fiscal Years
	2015		2014		2013
Restricted Stock Units and Awards Outstanding (Thousands)^(a)	1,157		1,383		1,462
Weighted-Average Fair Value at Grant Date	$	28.66	$	25.03	$	23.89
Restricted Stock Units and Awards Expense (Millions)^(a)	$	11	$	11	$	10
Unvested Restricted Stock Units and Awards Outstanding (Thousands)	406		601		705
Weighted-Average Fair Value of Unvested Units and Awards Outstanding	$	31.35	$	26.40	$	24.17

(a) Time-based restricted stock units were granted to certain employees under the respective Long-term Incentive Plans in the amount of 312,000, 371,000, and 524,000 in 2015, 2014 and 2013, respectively, as described below. These units vest over three years, therefore only a partial amount of expense was recognized in 2015, 2014, and 2013, 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 2013, 2014 and 2015, target performance units were granted to certain employees under three separate LTIP plans covering three-year cycles: the 2013-2015 (“2013-2015 LTIP”), 2014-2016 (“2014-2016 LTIP”) and 2015-2017 (“2015-2017 LTIP”) plans (collectively, the “plans”).

The key financial targets for the 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 cumulative operating ratio and average return on assets over the performance period will each comprise 50% of the payout and are measured independently of the other. The 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. The total benefit recognized due to the plans was $1 million for fiscal year 2015 reflecting adjustments for reduced award payouts. The expense incurred due to the plans was $19 million and $2 million for fiscal years 2014 and 2013, respectively.



	LTIP Plan (Plan Ended In)
	2015		2016		2017
Number of target units outstanding (Thousands)^(a)	1,317		1,115		826
Weighted-average fair value at grant date ^(a)	$	25.90	$	28.60	$	35.94
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

Restricted Stock Units

As part of the 2013-2015, 2014-2016 and 2015-2017 LTIP plans, 524 thousand, 371 thousand and 312 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 2015, there was $7 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)	2015		2016		2017		Weighted-Average Fair Value at Grant Date
Unvested at December 27, 2013	1,318		—		—		$	25.32
Granted in 2014	52		1,144		—		28.11
Forfeited in 2014	(40	)	(25	)	—		26.33
Unvested at December 26, 2014	1,330		1,119		—		26.66

Granted in 2015	63		134		935		35.45
Forfeited in 2015	(76	)	(138	)	(109	)	30.06
Vested at December 25, 2015	1,317		—		—		25.90
Unvested at December 25, 2015	—		1,115		826		$	31.73

Stock Awards for Directors

CSX’s non-management directors receive an annual retainer of $90,000 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
	2015		2014		2013
Shares Issued to Directors (Thousands)	62		79		105
Expense (Millions)	$	2	$	2	$	2
Weighted Average Grant Date Stock Price	$	34.59	$	28.01	$	23.12

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.