19. Stock-Based Incentive Compensation Plans

LNC Stock-Based Incentive Plans

We sponsor three stock-based incentive plans for our employees and directors and for the employees and agents of our subsidiaries that provide for the issuance of stock options, performance shares (performance-vested shares as opposed to service-vested shares), stock appreciation rights (“SARs”) and restricted stock units (“RSUs”). We issue new shares to satisfy option exercises.

Total compensation expense (in millions) by award type for all of our stock-based incentive plans was as follows:



	For the Years Ended December 31,
	2014		2013		2012
Stock options	$	9	$	9	$	8
Performance shares		12		10		5
SARs		2		5		1
RSUs and nonvested stock		15		16		17
Total	$	38	$	40	$	31

Recognized tax benefit	$	13	$	14	$	11

Total unrecognized compensation expense (in millions) and expected weighted-average life (in years) by award type for all of our stock-based incentive plans was as follows:



	For the Years Ended December 31,
	2014			2013			2012
			Weighted-			Weighted-			Weighted-
			Average			Average			Average
	Expense		Period	Expense		Period	Expense		Period
Stock options	$	8	1.5	$	9	1.9	$	6	1.8
Performance shares		9	1.5		9	1.5		9	1.6
SARs		3	3.2		3	3.4		1	3.3
RSUs and nonvested stock		21	1.0		18	1.2		20	1.3
Total unrecognized stock-based
incentive compensation expense	$	41		$	39		$	36

In the first quarter of 2014, a performance period from 2014-2016 was approved for certain of our executive officers by the Compensation Committee. The award for executive officers participating in this performance period consisted of LNC RSUs representing approximately 37%, LNC stock options representing approximately 25% and LNC performance shares representing approximately 38% of the total award. LNC RSUs granted for this period cliff-vest on the third anniversary of the grant date, based solely on a service condition. LNC stock options granted for this performance period have a maximum contractual term of ten years and vest ratably over the three-year period, based solely on a service condition. Depending on the performance results for this period, the ultimate payout of performance shares could range from zero to 200% of the target award. Under the 2014-2016 plan, a total of 462,231 LNC RSUs, 490,852 LNC stock options and 182,149 LNC performance shares were granted.

In the first quarter of 2013, a performance period from 2013-2015 was approved for certain of our executive officers by the Compensation Committee. The award for executive officers participating in this performance period consisted of LNC RSUs representing approximately 29%, LNC stock options representing approximately 35% and LNC performance shares representing approximately 36% of the total award. LNC RSUs granted for this period cliff-vest on the third anniversary of the grant date, based solely on a service condition. LNC stock options granted for this performance period have a maximum contractual term of ten years and vest ratably over the three-year period, based solely on a service condition. Depending on the performance results for this period, the ultimate payout of performance shares could range from zero to 200% of the target award. Under the 2013-2015 plan, a total of 583,404 LNC RSUs, 1,011,365 LNC stock options and 260,114 LNC performance shares were granted.

In the first quarter of 2012, a performance period from 2012-2014 was approved for certain of our executive officers by the Compensation Committee. The award for executive officers participating in this performance period consisted of LNC RSUs representing approximately 29%, LNC stock options representing approximately 35% and LNC performance shares representing approximately 36% of the total award. LNC RSUs granted for this period cliff-vest on the third anniversary of the grant date, based solely on a service condition. LNC stock options granted for this performance period have a maximum contractual term of ten years and vest ratably over the three-year period, based solely on a service condition. Depending on the performance results for this period, the ultimate payout of performance shares could range from zero to 200% of the target award. Under the 2012-2014 plan, a total of 766,217 LNC RSUs, 903,502 LNC stock options and 306,456 LNC performance shares were granted.

The option price assumptions used for our stock option awards were as follows:



	For the Years Ended December 31,
	2014		2013		2012
Weighted-average fair value per option granted	$	12.95	$	7.39	$	8.35
Assumptions:
Dividend yield		2.2%		2.4%		1.9%
Expected volatility		33.2%		34.1%		42.0%
Risk-free interest rate		0.9-1.8%		0.6-0.9%		0.9-1.2%
Expected life (in years)		5.4		5.6		5.8

The fair value of options is determined using a Black-Scholes options valuation model with the assumptions disclosed in the table above. The dividend yield is based on the expected dividend rate during the expected life of the option. Expected volatility is based on the implied volatility of exchange-traded securities and the historical volatility of the LNC stock price. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant. The expected life of the options granted represents the weighted-average period of time from the grant date to the date of exercise, expiration or cancellation based upon historical behavior.

Information with respect to our incentive plans involving stock options with performance conditions (aggregate intrinsic value shown in millions) was as follows:



						Weighted-
			Weighted-			Average
			Average		Remaining		Aggregate
			Exercise		Contractual		Intrinsic
	Shares		Price			Term	Value
Outstanding as of December 31, 2013	1,176,974		$	45.84
Granted – original	88,311			50.37
Exercised (includes shares tendered)	(133,044	)		34.14
Forfeited or expired	(60,494	)		40.46
Outstanding as of December 31, 2014	1,071,747		$	47.93		2.96	$	10

Vested or expected to vest as of December 31, 2014 (1)	1,016,926		$	48.31		2.93	$	10

Exercisable as of December 31, 2014	962,105		$	48.73		2.90	$	9

⁽¹⁾

Includes estimated forfeitures.

The total fair value of options with performance conditions vested during each of the years ended December 31, 2014, 2013 and 2012, was $1 million. The total intrinsic value of options exercised during the years ended December 31, 2014, 2013 and 2012, was $2 million, $1 million and zero, respectively.

Information with respect to our incentive plans involving stock options with service conditions (aggregate intrinsic value shown in millions) was as follows:



						Weighted-
			Weighted-			Average
			Average		Remaining		Aggregate
			Exercise		Contractual		Intrinsic
	Shares		Price			Term	Value
Outstanding as of December 31, 2013	4,928,353		$	38.18
Granted – original	490,852			50.80
Exercised (includes shares tendered)	(1,333,102	)		39.97
Forfeited or expired	(162,410	)		47.26
Outstanding as of December 31, 2014	3,923,693		$	38.65		5.87	$	79

Vested or expected to vest as of December 31, 2014 (1)	3,642,758		$	39.03		5.69	$	72

Exercisable as of December 31, 2014	2,571,235		$	39.99		4.57	$	49

⁽¹⁾

Includes estimated forfeitures.

The total fair value of options with service conditions vested during the years ended December 31, 2014, 2013 and 2012, was $7 million, $6 million and $4 million, respectively. The total intrinsic value of options exercised during the years ended December 31, 2014, 2013 and 2012, was $18 million, $6 million and zero, respectively.

Information with respect to our performance shares was as follows:



				Weighted-
				Average
			Grant-Date
	Shares			Fair Value
Nonvested as of December 31, 2013	710,692			$	32.74
Granted	182,149				54.68
Vested	(180,307	)			36.33
Forfeited	(10,108	)			37.74
Nonvested as of December 31, 2014	702,426			$	37.36

SARs

Under our incentive compensation plan, we issue SARs to certain planners and advisors who have full-time contracts with us. The SARs under this plan are rights on our stock that are cash settled and become exercisable in increments of 25% over the four-year period following the SARs grant date. SARs are granted with an exercise price equal to the fair market value of our stock at the date of grant and, unless cancelled earlier due to certain terminations of employment, expire five years from the date of grant. Generally, such SARs are transferable only upon death.

We recognize compensation expense for SARs based on the fair value method using the Black-Scholes option-pricing model. Compensation expense and the related liability are recognized on a straight-line basis over the vesting period of the SARs. The SARs liability is marked-to-market through net income, which causes volatility in net income (loss) as a result of changes in the market value of our stock and reported within commissions and other expenses on our Consolidated Statements of Comprehensive Income (Loss). The SARs liability as of December 31, 2014 and 2013, was $5 million and reported within other liabilities on our Consolidated Balance Sheets.

The option price assumptions used for our SARs were as follows:



	For the Years Ended December 31,
	2014		2013		2012
Weighted-average fair value per SAR granted	$	13.64	$	7.47	$	8.91
Assumptions:
Dividend yield		1.5%		2.2%		1.4%
Expected volatility		32.7%		30.5%		40.7%
Risk-free interest rate		1.7%		1.0%		1.3%
Expected life (in years)		5.0		5.0		5.0

The assumptions above are the same as those discussed for options above, except the dividend yield is based on the current dividend rate at the date of grant, expected volatility is based on the implied volatility of exchange-traded securities and the expected life represents the contractual term.

Information with respect to our SARs plan (aggregate intrinsic value shown in millions) was as follows:



						Weighted-
			Weighted-			Average
			Average		Remaining		Aggregate
			Exercise		Contractual		Intrinsic
	Shares		Price			Term	Value
Outstanding as of December 31, 2013	354,043		$	29.00
Granted – original	62,887			50.41
Exercised (includes shares tendered)	(93,532	)		24.86
Forfeited or expired	(15,439	)		35.82
Outstanding as of December 31, 2014	307,959		$	34.28		2.53	$	7

Vested or expected to vest as of December 31, 2014 (1)	292,889		$	34.20		2.50	$	7

Exercisable as of December 31, 2014	171,114		$	31.28		1.89	$	5

⁽¹⁾

Includes estimated forfeitures.

The payment for SARs exercised during the years ended December 31, 2014, 2013 and 2012, was $2 million, $1 million and zero, respectively.

RSUs

We award RSUs under the incentive compensation plan, generally subject to a three-year vesting period. Information with respect to our RSUs was as follows:



				Weighted-
				Average
			Grant-Date
	Shares			Fair Value
Outstanding as of December 31, 2013	1,630,407			$	28.24
Granted	462,231				50.95
Vested	(464,572	)			29.74
Forfeited	(100,391	)			33.43
Outstanding as of December 31, 2014	1,527,675			$	34.30