STOCK-BASED COMPENSATION

The Company grants stock-based compensation to employees and non-employee directors in the form of stock incentive plans, which include stock options, deferred stock and restricted stock. The Company also provides stock-based compensation in the form of performance deferred stock and the Employee Stock Purchase Plan (“ESPP”), which grants eligible employees the right to purchase shares of the Company's common stock at a discounted price.

In connection with the Merger, on August 31, 2017 ("Conversion Date") all outstanding Dow stock options and deferred stock awards were converted into stock options and deferred stock awards with respect to DowDuPont common stock. The stock options and deferred stock awards have the same terms and conditions under the applicable plans and award agreements prior to the Merger. All outstanding and nonvested performance deferred stock awards were converted into deferred stock awards with respect to DowDuPont common stock at the greater of the applicable performance target or the actual performance as of the effective time of the Merger. Changes in the fair value of liability instruments are recognized as compensation expense each quarter. Dow and DuPont did not merge their stock-based compensation plans as a result of the Merger. The Dow and DuPont stock-based compensation plans were assumed by DowDuPont and continue in place with the ability to grant and issue DowDuPont common stock.

The total stock-based compensation expense included in the consolidated statements of income was $359 million, $261 million and $352 million in 2017, 2016 and 2015, respectively. The income tax benefits related to stock-based compensation arrangements were $133 million, $97 million and $129 million in 2017, 2016 and 2015, respectively.

Accounting for Stock-Based Compensation

The Company grants stock-based compensation awards that vest over a specified period or upon employees meeting certain performance and/or retirement eligibility criteria. The fair value of equity instruments issued to employees is measured on the grant date. The fair value of liability instruments issued to employees (specifically, performance deferred stock awards, which are granted to executive employees subject to stock ownership requirements, that provide the recipient the option to elect to receive a cash payment equal to the value of the stock award on the date of delivery) is measured at the end of each quarter. The fair value of equity and liability instruments is expensed over the vesting period or, in the case of retirement, from the grant date to the date on which retirement eligibility provisions have been met and additional service is no longer required. The Company estimates expected forfeitures.

The Company historically used a lattice-based option valuation model to estimate the fair value of stock options and used a Monte Carlo simulation for the market portion of performance deferred stock awards. The Company used the Black-Scholes option valuation model for subscriptions to purchase shares under the ESPP. The weighted-average assumptions used to calculate total stock-based compensation are included in the following table:



Weighted-Average Assumptions	2017		2016		2015
Dividend yield	3.01	%	4.13	%	3.54	%
Expected volatility	23.71	%	31.60	%	27.84	%
Risk-free interest rate	1.28	%	1.12	%	1.02	%
Expected life of stock options granted during period (years)	7.5		7.8		7.7
Life of Employee Stock Purchase Plan (months)	3		4		6

The dividend yield assumption was equal to the dividend yield on the grant date, which reflected the most recent quarterly dividend payment of $0.46 per share in 2017 ($0.46 per share in 2016 and $0.42 per share in 2015). The expected volatility assumptions for stock options and ESPP were based on an equal weighting of the historical daily volatility for the term of the awards and current implied volatility from exchange-traded options. The expected volatility assumption for the market portion of the performance deferred stock awards was based on historical daily volatility for the term of the award. The risk-free interest rate was based on the weighted-average of U.S. Treasury strip rates over the contractual term of the options. The expected life of stock options granted was based on an analysis of historical exercise patterns.

Stock Incentive Plan

The Company has historically granted equity awards under various plans (the "Prior Plans"). On February 9, 2012, the Board authorized The Dow Chemical Company 2012 Stock Incentive Plan (the "2012 Plan"), which was approved by stockholders at the Company's annual meeting on May 10, 2012 ("Original Effective Date") and became effective on that date. On February 13, 2014, the Board adopted The Dow Chemical Company Amended and Restated 2012 Stock Incentive Plan (the "2012 Restated Plan"). The 2012 Restated Plan was approved by stockholders at the Company's annual meeting on May 15, 2014, and became effective on that date. The Prior Plans were superseded by the 2012 Plan and the 2012 Restated Plan (collectively, the "2012 Plan"). Under the 2012 Plan, the Company may grant options, deferred stock, performance deferred stock, restricted stock, stock appreciation rights and stock units to employees and non-employee directors until the tenth anniversary of the Original Effective Date, subject to an aggregate limit and annual individual limits. The terms of the grants are fixed at the grant date. Dow's stock-based compensation programs were assumed by DowDuPont and continue in place with the ability to grant and issue DowDuPont common stock. At December 31, 2017, there were approximately 29 million shares of DowDuPont common stock available for grant under the 2012 Plan.

Stock Options

The Company grants stock options to certain employees, subject to certain annual and individual limits, with terms of the grants fixed at the grant date. The exercise price of each stock option equals the market price of the common stock on the grant date. Options vest from one to three years, and have a maximum term of 10 years.

The following table summarizes stock option activity for 2017:



Stock Options	2017
Shares in thousands	Shares			Exercise Price ¹
Outstanding at Jan 1, 2017	34,770			$	36.20
Granted	2,221			$	61.19
Exercised	(10,194		)	$	36.02
Forfeited/Expired	(169		)	$	43.75
Outstanding at Dec 31, 2017	26,628			$	38.30
Remaining contractual life in years				5.10
Aggregate intrinsic value in millions	$	877
Exercisable at Dec 31, 2017	22,019			$	35.16
Remaining contractual life in years				4.43
Aggregate intrinsic value in millions	$	794

1. Weighted-average per share.



Additional Information about Stock Options
In millions, except per share amounts	2017		2016		2015
Weighted-average fair value per share of options granted	$	14.44	$	10.95	$	11.61
Total compensation expense for stock option plans	$	37	$	32	$	55
Related tax benefit	$	14	$	12	$	20
Total amount of cash received from the exercise of options	$	310	$	312	$	377
Total intrinsic value of options exercised ¹	$	286	$	153	$	175
Related tax benefit	$	106	$	57	$	65

1. Difference between the market price at exercise and the price paid by the employee to exercise the options.

Total unrecognized compensation cost related to unvested stock option awards of $15 million at December 31, 2017, is expected to be recognized over a weighted-average period of 1.65 years.

Deferred Stock

The Company grants deferred stock to certain employees. The grants vest after a designated period of time, generally one to three years. The following table shows changes in nonvested deferred stock, including the conversion of nonvested performance deferred stock awards into deferred stock awards as a result of the Merger:



Deferred Stock	2017
Shares in thousands	Shares		Grant Date Fair Value ¹
Nonvested at Jan 1, 2017	6,382		$	47.49
Granted	1,709		$	61.29
Vested	(2,804	)	$	47.60
Canceled	(112	)	$	50.14
Conversion of performance deferred stock awards at Conversion Date	8,171		$	49.94
Nonvested at Dec 31, 2017	13,346		$	50.71

1. Weighted-average per share.



Additional Information about Deferred Stock
In millions, except per share amounts	2017		2016		2015
Weighted-average fair value per share of deferred stock granted	$	61.29	$	46.25	$	49.42
Total fair value of deferred stock vested	$	179	$	166	$	162
Related tax benefit	$	66	$	61	$	60
Total compensation expense for deferred stock awards	$	178	$	97	$	110
Related tax benefit	$	66	$	36	$	41

Total unrecognized compensation cost related to deferred stock awards of $165 million at December 31, 2017, is expected to be recognized over a weighted-average period of 1.64 years. At December 31, 2017, approximately 20,000 deferred shares with a grant date weighted-average fair value per share of $35.99 had previously vested, but were not issued. These shares are scheduled to be issued to employees within one to three years or upon retirement.

Total incremental pretax compensation expense resulting from the conversion of performance deferred stock awards into deferred stock awards was $25 million ($20 million was recognized in the second half of 2017 and $5 million to be recognized over the remaining service period). Approximately 5,000 employees were impacted by the conversion.

Performance Deferred Stock

The Company grants performance deferred stock to certain employees. The grants vest when the Company attains specified performance targets, such as return on capital and relative total shareholder return, over a predetermined period, generally one to three years. In November 2017, the Company granted performance deferred stock to senior leadership measured on the realization of cost savings in connection with cost synergy commitments, as well as the Company’s ability to complete the Intended Business Separations. Performance and payouts are determined independently for each metric. Compensation expense related to performance deferred stock awards is recognized over the lesser of the service or performance period. Changes in the fair value of liability instruments are recognized as compensation expense each quarter.

The following table shows the performance deferred stock awards granted:



Performance Deferred Stock Awards		Target Shares Granted ¹	Grant Date Fair Value ²
Shares in thousands
Year	Performance Period
2017	Sep 1, 2017 – Aug 31, 2019	232	$	71.16
2017 ³	Jan 1, 2017 – Dec 31, 2019	1,728	$	81.99
2016 ³	Jan 1, 2016 – Dec 31, 2018	2,283	$	52.68
2015 ³	Jan 1, 2015 – Dec 31, 2017	2,258	$	59.08

1. At the end of the performance period, the actual number of shares issued can range from zero to 200% of target shares granted.

2. Weighted-average per share.

3. Converted to deferred stock as a result of the Merger.

The following table shows changes in nonvested performance deferred stock, including the conversion of nonvested performance deferred stock awards into deferred stock awards as a result of the Merger:



Performance Deferred Stock	2017
Shares in thousands	Target Shares Granted		Grant Date Fair Value ¹
Nonvested at Jan 1, 2017	4,454		$	55.85
Granted	1,960		$	80.71
Canceled	(131	)	$	58.91
Converted to deferred stock awards	(6,051	)	$	63.24
Nonvested at Dec 31, 2017	232		$	71.16

1. Weighted-average per share.



Additional Information about Performance Deferred Stock
In millions, except share amounts	2017		2016		2015
Total fair value of performance deferred stock vested and delivered ¹	$	202	$	103	$	37
Related tax benefit	$	75	$	38	$	14
Total compensation expense for performance deferred stock awards	$	106	$	125	$	172
Related tax benefit	$	39	$	46	$	63
Shares of performance deferred stock settled in cash (in thousands) ²	616		861		327
Total cash paid to settle performance deferred stock awards ³	$	38	$	40	$	16

1. Includes the fair value of shares vested in prior years and delivered in the reporting year.

2. Performance deferred stock awards vested in prior years and delivered in the reporting year.

3. Cash paid to certain executive employees for performance deferred stock awards vested in prior periods and delivered in the reporting year, equal to the value of the stock award on the date of delivery.

Total unrecognized compensation cost related to performance deferred stock awards of $15 million at December 31, 2017, is expected to be recognized over a weighted-average period of 1.66 years.

Restricted Stock

Under the 2012 Plan, the Company may grant shares (including options, stock appreciation rights, stock units and restricted stock) to non-employee directors over the 10-year duration of the program, subject to the plan's aggregate limit as well as annual individual limits. The restricted stock issued under this plan cannot be sold, assigned, pledged or otherwise transferred by the non-employee director, until retirement or termination of service to the Company. The following table shows the restricted stock issued under this plan:



Restricted Stock	Shares Issued (in thousands)	Weighted-Average Fair Value
Year	Shares Issued (in thousands)	Weighted-Average Fair Value
2017	33	$	62.04
2016	32	$	50.55
2015	32	$	51.51

Employee Stock Purchase Plan

On February 9, 2012, the Board authorized The Dow Chemical Company 2012 Employee Stock Purchase Plan (the "2012 ESPP") which was approved by stockholders at the Company’s annual meeting on May 10, 2012. Under the 2017 annual offering, most employees were eligible to purchase shares of common stock of the Company valued at up to 10 percent of their annual base salary. The value is determined using the plan price multiplied by the number of shares subscribed to by the employee. The plan price of the stock is set at an amount equal to at least 85 percent of the fair market value (closing price) of the common stock on a date during the fourth quarter of the year prior to the offering, or the average fair market value (closing price) of the common stock over a period during the fourth quarter of the year prior to the offering, in each case, specified by the Executive Vice President of Human Resources. The most recent offering of the 2012 ESPP closed on July 15, 2017, and no current offerings remain outstanding.



Employee Stock Purchase Plan	2017
Shares in thousands	Shares		Exercise Price ¹
Outstanding and exercisable at Jan 1, 2017	—		$	—
Granted	3,578		$	50.22
Exercised	(3,560	)	$	50.22
Forfeited/Expired	(18	)	$	50.22
Outstanding and exercisable at Dec 31, 2017	—		$	—

1. Weighted average price per share.



Additional Information about Employee Stock Purchase Plan
In millions, except per share amounts	2017		2016		2015
Weighted-average fair value per share of purchase rights granted	$	10.70	$	3.40	$	4.62
Total compensation expense for ESPP	$	38	$	7	$	15
Related tax benefit	$	14	$	3	$	5
Total amount of cash received from the exercise of purchase rights	$	179	$	86	$	131
Total intrinsic value of purchase rights exercised ¹	$	48	$	23	$	25
Related tax benefit	$	18	$	9	$	9

1. Difference between the market price at exercise and the price paid by the employee to exercise the purchase rights.