Stock-Based Compensation (Notes)

6 Months Ended

Jun. 30, 2014

Share-based Compensation [Abstract]

STOCK-BASED COMPENSATION

STOCK-BASED COMPENSATION

Stock-based compensation expense (benefit), including discontinued operations, was as follows (in millions):

	Three Months Ended June 30,					Six Months Ended June 30,
	2014		2013			2014			2013
Stock appreciation rights	$	13	$	(15	)	$	(5	)	$	24
Performance share awards	7		2			4			10
Market stock units	5		4			8			8
Other stock-based awards	1		4			1			5
Total Stock-Based Compensation Expense (Benefit)	$	26	$	(5	)	$	8		$	47

We have aggregated expenses for certain award types as they are not considered significant. The income tax effect recognized in the income statement for stock-based compensation was a benefit of $9 million and an expense of $3 million for the three months ended June 30, 2014 and 2013, respectively, and a benefit of $2 million and $17 million for the six months ended June 30, 2014 and 2013, respectively. The reduction in current taxes payable recognized from tax deductions resulting from exercises and vestings under all of our stock-based compensation arrangements totaled $30 million and $21 million for the three months ended June 30, 2014 and 2013, respectively, and $33 million and $38 million for the six months ended June 30, 2014 and 2013, respectively.

Stock Appreciation Rights

A stock appreciation right (“SAR”) entitles an employee to receive cash in an amount equal to the excess of the fair market value of one share of common stock on the date of exercise over the grant price of the SAR. The fair value of each SAR is estimated at the end of each reporting period using the Black-Scholes option-pricing model. We have not granted any SARs since 2010. We paid cash of $14 million and $30 million to settle 0.5 million and 1.3 million SARs that were exercised during the six months ended June 30, 2014 and 2013, respectively. We had $57 million and $76 million recorded in accrued liabilities associated with our SARs awards at June 30, 2014 and December 31, 2013, respectively.

Performance Share Awards

During the six months ended June 30, 2014, we granted 0.2 million performance share awards, including awards with performance and market conditions, at a weighted average grant date fair value of $53.89 per share under the amended and restated 2011 Long-Term Incentive Plan (“2011 Plan”). These performance share awards vest at the end of the performance period. Payout of these equity awards can range from 0% to 200% of the number of target shares granted and are tied to performance conditions or market conditions over the performance period. The fair value of performance share awards are estimated using the market price of our common stock on the grant date or using a Monte Carlo simulation model on the grant date. The value ultimately paid for performance share awards tied to performance or market conditions, which are measured against our performance peer group and the S&P 500 Index, is based on return on capital employed or relative total shareholder return, respectively. The estimated fair value of these performance share awards is amortized over a three-year vesting period using the straight-line method.

Market Stock Units

We granted 0.4 million market stock units at a weighted average grant date fair value of $59.16 per unit under the 2011 Plan during the six months ended June 30, 2014. These market stock units vest at the end of a three-year performance period. The number of shares ultimately issued will be based on Tesoro’s stock price changes over the performance period. The market stock units’ potential payout can range from 50-200% of targeted award value, unless the average closing stock price at vesting has decreased more than 50% from the average closing stock price at the grant date in which case no market stock units will be paid out. The fair value of each market stock unit is estimated on the grant date using a Monte Carlo simulation model. The estimated fair value of these market stock units is amortized over a three-year vesting period using the straight-line method.