STOCK-BASED COMPENSATION

Our 2014 Long Term Stock Incentive Plan (the “2014 Plan”) provides for the issuance of stock-based incentives in various forms to our employees and non-employee Directors. At September 30, 2016, outstanding stock-based incentives were in the form of long-term stock awards, stock options, phantom stock awards and stock appreciation rights. Pre-tax compensation expense and the related income tax benefit for these stock-based incentives were as follows, in millions:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Long-term stock awards	$	5	$	6	$	17	$	19
Stock options	1		1		2		5
Phantom stock awards and stock appreciation rights	4		—		6		6
Total	$	10	$	7	$	25	$	30
Income tax benefit (37 percent tax rate)	$	4	$	3	$	9	$	11

Long-Term Stock Awards. Long-term stock awards are granted to our key employees and non-employee Directors and do not cause net share dilution provided we continue the practice of repurchasing and retiring an equal number of shares in the open market. We granted 1,050,380 shares of long-term stock awards in the nine-month period ended September 30, 2016.

I. STOCK-BASED COMPENSATION (Continued)

Our long-term stock award activity was as follows, shares in millions:



	Nine Months Ended September 30,
	2016		2015
Unvested stock award shares at January 1	5		6
Weighted average grant date fair value	$	17	$	18

Stock award shares granted	1		1
Weighted average grant date fair value	$	26	$	26

Stock award shares vested	2		2
Weighted average grant date fair value	$	16	$	17

Stock award shares forfeited	—		—
Weighted average grant date fair value	$	20	$	18

Forfeitures upon spin off (A)	—		1
Weighted average grant date fair value	$	—	$	20

Modification upon spin off (B)	—		1

Unvested stock award shares at September 30	4		5
Weighted average grant date fair value	$	20	$	17

(A) In connection with the spin off of TopBuild, TopBuild employees forfeited their outstanding Masco equity awards.

(B) Subsequent to the separation of TopBuild, we modified our outstanding equity awards to employees and non-employee Directors such that all individuals received an equivalent fair value both before and after the separation. The modification to the outstanding stock awards was made pursuant to existing anti-dilution provisions in our 2014 Plan and 2005 Long Term Incentive Plan.

At September 30, 2016 and 2015, there was $49 million and $47 million, respectively, of total unrecognized compensation expense related to unvested stock awards; such awards had a weighted average remaining vesting period of three years at both September 30, 2016 and 2015.

The total market value (at the vesting date) of stock award shares which vested during the nine-month periods ended September 30, 2016 and 2015 was $43 million and $54 million, respectively.

Stock Options. Stock options are granted to our key employees. The exercise price equals the market price of our common stock at the grant date. These options generally become exercisable (vest ratably) over five years beginning on the first anniversary from the date of grant and expire no later than 10 years after the grant date.

We granted 474,500 of stock option shares in the nine-month period ended September 30, 2016 with a grant date exercise price approximating $26 per share. In the nine-month period ended September 30, 2016, no stock option shares were forfeited (including options that expired unexercised).

I. STOCK-BASED COMPENSATION (Continued)

Our stock option activity was as follows, shares in millions:



		Nine Months Ended September 30,
		2016		2015
Option shares outstanding, January 1		12		18
Weighted average exercise price (A)	$	17	$	21

Option shares granted		—		—
Weighted average exercise price	$	26	$	26

Option shares exercised		5		3
Aggregate intrinsic value on date of exercise (B)	$	64 million	$	32 million
Weighted average exercise price	$	21	$	17

Option shares forfeited		—		3
Weighted average exercise price	$	—	$	29

Forfeitures upon spin off (C)		—		—
Weighted average exercise price	$	—	$	19

Modification upon spin off (A)		—		2

Option shares outstanding, September 30		7		14
Weighted average exercise price	$	15	$	17
Weighted average remaining option term (in years)		4		4

Option shares vested and expected to vest, September 30		7		14
Weighted average exercise price	$	15	$	17
Aggregate intrinsic value (B)	$	137 million	$	111 million
Weighted average remaining option term (in years)		4		4

Option shares exercisable (vested), September 30		6		12
Weighted average exercise price	$	13	$	18
Aggregate intrinsic value (B)	$	117 million	$	96 million
Weighted average remaining option term (in years)		3		3

(A)

Subsequent to the separation of TopBuild, we modified our outstanding equity awards to employees and non-employee Directors such that all individuals received an equivalent fair value both before and after the separation. The modification to the outstanding options was made pursuant to existing anti-dilution provisions in our 2014 Plan and 2005 Long Term Incentive Plan. The modification contributed to the lower exercise price.


(B)	Aggregate intrinsic value is calculated using our stock price at each respective date, less the exercise price (grant date price), multiplied by the number of shares.


(C)	In connection with the spin off of TopBuild, TopBuild employees forfeited their outstanding Masco equity awards.

I. STOCK-BASED COMPENSATION (Concluded)

At September 30, 2016 and 2015, there was $7 million and $6 million, respectively, of unrecognized compensation expense (using the Black-Scholes option pricing model at the grant date) related to unvested stock options; such options had a weighted average remaining vesting period of three years at September 30, 2016 and two years at September 30, 2015.

The weighted average grant date fair value of option shares granted and the assumptions used to estimate those values using a Black-Scholes option pricing model were as follows:



	Nine Months Ended September 30,
	2016			2015
Weighted average grant date fair value	$	6.43		$	9.67
Risk-free interest rate	1.41		%	1.75		%
Dividend yield	1.49		%	1.32		%
Volatility factor	29.00		%	42.00		%
Expected option life	6 years			6 years