Note J – Incentive Plans

Murphy utilizes cash-based and/or share-based incentive plans to supplement normal salaries as compensation for executive management and certain employees. For share-based awards that qualify for equity accounting, costs are recognized as an expense in the financial statements using a grant date fair value-based measurement method over the periods that the awards vest. For share-based awards that are required to be accounted for under liability accounting rules, costs are recognized as expense using a fair value-based measurement method over the vesting period, but expense is adjusted as necessary through the date the award value is finally determined. Total expense for liability awards is ultimately adjusted to the final intrinsic value for the award.

In 2012, the Company’s shareholders approved replacement of the 2007 Annual Incentive Plan (2007 Annual Plan) and the 2007 Long-Term Incentive Plan (2007 Long-Term Plan) with the 2012 Annual Incentive Plan (2012 Annual Plan) and 2012 Long-Term Incentive Plan (2012 Long-Term Plan), respectively. All awards to employees on or after May 9, 2012 have been made under the respective 2012 plans.

The 2012 Annual Plan and the 2007 Annual Plan authorize the Executive Compensation Committee (the Committee) to establish specific performance goals associated with annual cash awards that may be earned by officers, executives and certain other employees. Cash awards under the 2012 Annual Plan and 2007 Annual Plan are determined based on the Company’s actual financial and operating results as measured against the performance goals established by the Committee. The 2012 Long-Term Plan and the 2007 Long-Term Plan authorize the Committee to make grants of the Company’s Common Stock to employees. These grants may be in the form of stock options (nonqualified or incentive), stock appreciation rights (SAR), restricted stock, restricted stock units, performance units, performance shares, dividend equivalents and other stock-based incentives. The 2012 Long-Term Plan expires in 2022. A total of 8,700,000 shares are issuable during the life of the 2012 Long-Term Plan, with annual grants limited to 1% of Common shares outstanding; allowed shares not granted may be granted in future years. Based on awards made to date, approximately 5,481,000 shares remained available for grant under the 2012 Long-Term Plan at December 31, 2014. The Company also has a 2013 Stock Plan for Non-Employee Directors (Director Plan) that permits the issuance of restricted stock, restricted stock units and stock options or a combination thereof to the Company’s Non-Employee Directors.

Amounts recognized in the financial statements with respect to share-based plans are shown in the following table.



(Thousands of dollars)	2014		2013	2012
Compensation charged against income before income tax benefit	$	53,157	66,976	46,694
Related income tax benefit recognized in income		15,604	19,321	14,443

As of December 31, 2014, there was $46,024,000 in compensation costs to be expensed over approximately the next two years related to unvested share-based compensation arrangements granted by the Company. Beginning January 1, 2014, employees will receive net shares, after applicable statutory withholding taxes, upon each stock option exercise. Cash received from options exercised under all share-based payment arrangements for the years ended December 31, 2013 and 2012 was $2,395,000 and $10,375,000, respectively. Total income tax benefits realized from tax deductions related to stock option exercises under share-based payment arrangements were $5,364,000, $7,435,000 and $5,920,000 for the years ended December 31, 2014, 2013 and 2012, respectively.

Share-Settled Awards

STOCK OPTIONS – The Committee fixes the option price of each option granted at no less than fair market value (FMV) on the date of the grant and fixes the option term at no more than seven years from such date. Each option granted to date under the 2012 Long-Term Plan and the 2007 Long-Term Plan has been nonqualified, with a term of seven years and an option price equal to FMV at date of grant. Under the 2012 Long-Term Plan and the 2007 Long-Term Plan, one-half of each grant is generally exercisable after two years and the remainder after three years. For stock options, the number of shares issued upon exercise is reduced for settlement of applicable statutory income tax withholdings owed by the grantee.

The fair value of each option award is estimated on the date of grant using the Black-Scholes pricing model based on the assumptions noted in the following table. Expected volatility is based on historical volatility of the Company’s stock and implied volatility on publicly traded at-the-money options on the Company’s stock. The Company estimates the expected term of the options granted based on historical option exercise patterns and considers certain groups of employees exhibiting different behavior. The risk-free interest rate for periods within the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant.



	2014	2013	2012

Fair value per option grant	$12.84	$15.81 – $20.62	$12.37 – $17.74
Assumptions
Dividend yield	2.00%	2.10% – 2.30%	1.80% – 2.27%
Expected volatility	29.00%	34.00% – 36.00%	39.00% – 39.62%
Risk-free interest rate	1.62%	0.96% – 2.00%	0.55% – 0.77%
Expected life	5.35 yrs.	5.25 yrs. – 6.50 yrs.	4.00 yrs. – 5.20 yrs.

Changes in stock options outstanding during the last three years are presented in the following table.



	Number of Shares	Average Exercise Price
Outstanding at December 31, 2011	5,434,228	$	55.17
Granted at FMV	1,870,500		57.96
Exercised	(823,855)		38.37
Forfeited	(573,514)		60.43
Outstanding at December 31, 2012	5,907,359		55.17
Granted at FMV	1,320,176		55.26
Exercised	(1,335,355)		45.84
Forfeited	(228,576)		58.01
Surrendered in connection with separation of Murphy USA Inc.	(272,936)		55.99
Murphy USA Inc. spin-off adjustment	615,917		52.09
Outstanding at December 31, 2013	6,006,585		56.80
Granted at FMV	772,900		55.82
Exercised	(862,407)		49.27
Forfeited	(314,828)		54.53
Outstanding at December 31, 2014	5,602,250		57.95

Exercisable at December 31, 2011	2,319,735	$	51.14
Exercisable at December 31, 2012	2,474,636		54.43
Exercisable at December 31, 2013	2,435,322		51.79
Exercisable at December 31, 2014	3,030,105		53.10

Additional information about stock options outstanding at December 31, 2014 is shown below.



	Options Outstanding				Options Exercisable
Range of Exercise Prices per Option	No. of Options	Avg. Life Remaining in Years	Aggregate Intrinsic Value		No. of Options	Avg. Life Remaining in Years	Aggregate Intrinsic Value
$37.44 to $39.02	444,524	2.4	$	5,533,247	356,103	1.9	$	4,516,795
$43.88 to $51.63	1,772,764	1.8		2,786,024	1,162,708	2.4		2,786,024
$54.21 to $63.46	3,384,962	4.0		–	1,511,294	2.1		–
	5,602,250	3.6	$	8,319,271	3,030,105	2.4	$	7,302,819

The total intrinsic value of options exercised during 2014, 2013 and 2012 was $12,003,000, $25,284,000 and $17,197,000, respectively. Intrinsic value is the excess of the market price of stock at date of exercise over the exercise price received by the Company upon exercise. Aggregate intrinsic value is nil when the exercise price of the stock option exceeds the market price of the Company’s Common stock.

In February 2013, the Committee reduced the exercise price of all outstanding stock options by $2.50 per share to reflect the impact of the special dividend of the same amount paid in December 2012. The exercise prices in the preceding tables beginning in 2013 reflect this $2.50 reduction in exercise price approved in 2013. The income statement effect of this reduced exercise price was an expense of $6,454,000 in 2013.

In order to preserve the economic value of unexercised stock options following the spin-off of Murphy USA Inc. on August 30, 2013, the number of outstanding stock options was increased by 10.7% and the exercise price of stock options was reduced by 10.7%. The number of options and the exercise prices in the preceding tables reflect these adjustments related to the MUSA spin-off. There was no immediate impact on the expense for stock options recognized in 2013 related to this exercise price adjustment.

PERFORMANCE-BASED RESTRICTED STOCK UNITS – Performance-based restricted stock units (PRSUS) to be settled in Common shares were granted in each of the last three years under the 2012 Long-Term Plan or the 2007 Long-Term Plan. Each grant will vest if the Company achieves specific performance objectives at the end of the designated performance period. Additional shares may be awarded if performance objectives are exceeded. If performance goals are not met, PRSUS will not vest, but recognized compensation cost associated with the stock award would not be reversed. For past awards, the performance conditions were based on the Company’s total shareholder return over the performance period compared to an industry peer group of companies. During the performance period, PRSUS are subject to transfer restrictions and are subject to forfeiture if a grantee terminates for reasons other than retirement, disability or death. Termination for these three reasons will lead to a pro rata award of amounts earned. No dividends are paid or voting rights exist on awards of PRSUS prior to their settlement.

Upon the separation of Murphy USA Inc. on August 30, 2013, adjustments to outstanding PRSUS were made to the number of units outstanding to preserve the economic value of these awards.

Changes in PRSUS outstanding for each of the last three years are presented in the following table.



(Number of share units)	2014	2013	2012
Outstanding at beginning of year	1,560,292	1,426,238	1,174,492
Granted	464,300	521,776	653,355
Awarded	(473,186)	(380,150)	(260,175)
Forfeited	(154,366)	(39,573)	(141,434)
Surrendered in connection with separation of Murphy USA Inc.	–	(116,568)	–
Murphy USA Inc. spin-off adjustment	–	148,569	–
Outstanding at end of year	1,397,040	1,560,292	1,426,238

The fair value of the equity-settled performance-based awards granted in each year was estimated on the date of grant using a Monte Carlo valuation model. Expected volatility was based on daily historical volatility of the Company’s stock price compared to a peer group average over a three-year period. The risk-free interest rate is based on the yield curve of three-year U.S. Treasury bonds and the stock beta was calculated using three years of historical averages of daily stock data for Murphy and the peer group. The assumptions used in the valuation of the performance awards granted in 2014, 2013 and 2012 are presented in the following table.



	2014	2013	2012

Fair value per share at grant date	$33.90 – $51.30	$39.50 – $68.01	$54.90 – $63.64
Assumptions
Expected volatility	29.00%	31.00% – 32.00%	37.00%
Risk-free interest rate	0.65%	0.41% – 0.62%	0.30%
Stock beta	0.843	0.907 – 0.908	0.913
Expected life	3.0 yrs.	3.0 yrs.	3.0 yrs.

TIME-LAPSE RESTRICTED STOCK UNITS – Time-lapsed restricted stock units (TSUS) have been granted to the Company’s Non-Employee Directors under the Directors Plan and, beginning in 2014, to certain employees under the 2012 Long-Term Plan. These awards vest on the third anniversary of the date of grant. The fair value of these awards was estimated based on the market value of the Company’s stock on the date of grant, which were $55.20 to $60.85 per share in 2014, $60.30 to $69.67 per share in 2013, and $59.33 per share in 2012. To retain economic value at the time of spin-off of Murphy USA Inc., the number of TSUS was increased by 10.7% for each unit outstanding on August 30, 2013.

Changes in TSUS outstanding for each of the last three years are presented in the following table.



(Number of share units)	2014	2013	2012

Outstanding at beginning of year	112,881	98,477	116,724
Granted	278,892	38,184	42,256
Vested and issued	(54,884)	(34,696)	(44,980)
Forfeited	(15,100)	–	(15,523)
Murphy USA Inc. spin-off adjustment	–	10,916	–
Outstanding at end of year	321,789	112,881	98,477

EMPLOYEE STOCK PURCHASE PLAN (ESPP) – The Company has an ESPP under which the Company’s Common stock can be purchased by eligible U.S. and Canadian employees. Each quarter, an eligible employee may elect to withhold up to 10% of his or her salary to purchase shares of the Company’s stock at the end of the quarter at a price equal to 90% of the fair value of the stock as of the first day of the quarter. The ESPP will terminate on the earlier of the date that employees have purchased all 980,000 authorized shares or June 30, 2017. Employee stock purchases under the ESPP were 6,739 shares at an average price of $56.22 per share in 2014, 16,020 shares at an average price of $54.14 per share in 2013 and 24,418 shares at an average price of $48.54 per share in 2012. At December 31, 2014, 280,202 shares remained available for sale under the ESPP. Compensation costs related to the ESPP are estimated based on the value of the 10% discount and the fair value of the option that provides for the refund of participant withholdings, and such expenses were $55,000 in 2014, $143,000 in 2013 and $272,000 in 2012. The fair value per share issued under the ESPP was approximately $6.49, $6.72 and $7.30 for the years ended December 31, 2014, 2013 and 2012, respectively.

Cash-Settled Awards

The Company has granted stock-based incentive awards to be settled in cash to certain employees in the form of Stock Appreciation Rights (SAR), Performance-based restricted stock units (PRSUC), Time-based restricted stock units (TRSUC) and Phantom units.

SAR awards have terms similar to stock options, PRSUC terms are similar to other performance-based restricted stock awards and TRSUC and Phantom units are generally settled on the third anniversary of the date of grant. Each award granted is settled, net of applicable income tax withholdings, in cash rather than with Common shares. Total expense recorded in the Consolidated Statements of Income for all cash-settled stock-based awards was $9,667,000 in 2014, $9,436,000 in 2013 and $552,000 in 2012.

Upon the separation of Murphy USA Inc. on August 30, 2013, adjustments to outstanding PRSUC were made to the number of units outstanding to preserve the economic value of these awards.

The Committee also administers the Company’s incentive compensation plans, which provide for annual or periodic cash awards to officers, directors and certain other employees. These cash awards are generally determinable based on the Company achieving specific financial and/or operational objectives. Compensation expense of $38,000,000, $53,250,000 and $32,417,000 was recorded in 2014, 2013 and 2012, respectively, for these plans.