Note 12. Stock-Based and Other Compensation Plans

We recognized total stock-based compensation expense as follows:



	Year Ended December 31,
(millions)	2016			2015			2014
Stock-Based Compensation Expense Included in
General and Administrative Expense	$	62		$	50		$	63
Exploration Expense and Other	15			36			24
Total Stock-Based Compensation Expense	$	77		$	86		$	87
Tax Benefit Recognized	$	(27	)	$	(30	)	$	(31	)

Stock Option and Restricted Stock Plans Our stock option and restricted stock plans are described below.

1992 Stock Option and Restricted Stock Plan Under the Noble Energy, Inc. 1992 Stock Option and Restricted Stock Plan, as amended (the 1992 Plan), the Compensation, Benefits and Stock Option Committee of the Board of Directors (the Committee) may grant stock options and stock appreciation rights and award restricted stock and cash awards to our officers or other employees and those of our subsidiaries. The maximum number of shares that may be granted under the 1992 Plan is 77,400,000 shares of common stock. At December 31, 2016, 27,581,280 shares of our common stock were reserved for issuance, including 13,059,725 shares available for future grants and awards, under the 1992 Plan.

Stock options are issued with an exercise price equal to the fair market value of our common stock on the date of grant, and are subject to such other terms and conditions as may be determined by the Committee. Unless granted by the Committee for a shorter term, the options expire 10 years from the grant date. Option grants generally vest ratably over a three-year period.

Restricted stock awards made under the 1992 Plan are subject to such restrictions, terms and conditions, including forfeitures, if any, as may be determined by the Committee. During the period in which such restrictions apply, unless specifically provided otherwise in accordance with the terms of the 1992 Plan, the recipient of restricted stock would be the record owner of the shares and have all the rights of a stockholder with respect to the shares, including the right to vote and the right to receive dividends or other distributions made or paid with respect to the shares. The dividends or other distributions pertaining to the restricted shares will be held by the Company until the restriction period ends and the shares vest or forfeit. If the restricted shares forfeit, then the recipient shall not be entitled to receive the dividend or distribution which will transfer to the Company. Restricted stock awards with a time-vested restriction vest over a two or three year period. Restricted stock awards with a performance-vested restriction cliff vest after a three year period if the Company achieves certain levels of total shareholder return relative to a pre-determined industry peer group.

2015 Stock Plan for Non-Employee Directors The 2015 Stock Plan for Non-Employee Directors of Noble Energy, Inc., as amended (the 2015 Plan) provides for grants of stock options and awards of restricted stock to our non-employee directors. The 2015 Plan superseded and replaced the 2005 Stock Plan for Non-Employee Directors of Noble Energy, Inc. The total number of shares of our common stock that may be issued under the 2015 Plan is 708,996. At December 31, 2016, 705,615 shares of our common stock were reserved for issuance including 563,075 shares available for future grants and awards, under the 2015 Plan.

2005 Stock Plan for Non-Employee Directors The 2005 Stock Plan for Non-Employee Directors of Noble Energy, Inc., as amended (the 2005 Plan) provides for grants of stock options and awards of restricted stock to our non-employee directors. At December 31, 2016, 404,865 shares of our common stock were reserved for issuance in accordance with the 2005 Plan; however, the 2005 Plan was terminated in 2015, and no additional options can be granted thereunder. Options were issued with an exercise price equal to the market price of our common stock on the date of grant and may be exercised one year after the date of grant. Unless granted by the Board of Directors for a shorter term, the options expire 10 years from the date of grant.

Stock Option Grants The fair value of each stock option granted is estimated on the date of grant using a Black-Scholes-Merton option valuation model that used the assumptions described below:

•

Expected term The expected term represents the period of time that options granted are expected to be outstanding, which is the grant date to the date of expected exercise or other expected settlement for options granted. The hypothetical midpoint scenario we use considers our actual exercise and post-vesting cancellation history and expectations for future periods, which assumes that all vested, outstanding options are settled halfway between the current date and their expiration date.

•

Expected volatility The expected volatility represents the extent to which our stock price is expected to fluctuate between the grant date and the expected term of the award. We use the historical volatility of our common stock for a period equal to the expected term of the option prior to the date of grant. We believe that historical volatility produces an estimate that is representative of our expectations about the future volatility of our common stock over the expected term.


•	Risk-free rate The risk-free rate is the implied yield available on US Treasury securities with a remaining term equal to the expected term of the option. We base our risk-free rate on a weighting of five and seven year US Treasury securities as of the date of grant.


•	Dividend yield The dividend yield represents the value of our stock’s annualized dividend as compared to our stock’s average price for the three-year period ended prior to the date of grant. It is calculated by dividing one full year of our expected dividends by our average stock price over the three-year period ended prior to the date of grant.

The assumptions used in valuing stock options granted were as follows:



	Year Ended December 31,
(weighted averages)	2016			2015			2014
Expected Term (in Years)	6.3			6.0			5.9
Expected Volatility	32.4		%	32.6		%	35.1		%
Risk-Free Rate	1.6		%	1.4		%	1.8		%
Expected Dividend Yield	0.7		%	1.2		%	1.1		%
Weighted Average Grant-Date Fair Value	$	10.10		$	13.93		$	20.31

Stock option activity was as follows:



	Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
			(per share)		(in years)	(in millions)
Outstanding at December 31, 2015	14,571,012		$	44.59
Granted	2,441,042		31.66
Exercised	(954,898	)	25.96
Forfeited	(968,294	)	47.27
Outstanding at December 31, 2016	15,088,862		$	43.49	5.4	$	40
Exercisable at December 31, 2016	10,999,318		$	44.54	4.3	$	26

The total intrinsic value of options exercised was $10 million in 2016, $7 million in 2015, and $58 million in 2014.

As of December 31, 2016, $26 million of compensation cost related to unvested stock options granted under the Plans remained to be recognized. The cost is expected to be recognized over a weighted-average period of 1.3 years. We issue new shares of our common stock to settle option exercises. Dividends are not paid on unexercised options.

Restricted Stock Awards Awards of time-vested restricted stock (shares subject to service conditions) are valued at the price of our common stock at the date of award. The fair value of the market based restricted stock awards was estimated on the date of award using a Monte Carlo valuation model that uses the assumptions in the following table. The Monte Carlo valuation model is based on random projections of stock price paths and must be repeated numerous times to achieve a probabilistic assessment. Expected volatility represents the extent to which our stock price is expected to fluctuate between now and the award’s anticipated term. We use the historical volatility of Noble Energy common stock for the three-year period ended prior to the date of award. The risk-free rate is based on a three-year period for U.S. Treasury securities as of the year ended prior to the date of award.

The assumptions used in valuing market based restricted stock awards granted were as follows:



	Year Ended December 31,
	2016		2015
Number of Simulations	500,000		500,000
Expected Volatility	38	%	30	%
Risk-Free Rate	1.0	%	0.8	%

Restricted stock activity was as follows:



	Subject to Time Vesting				Subject to Market Conditions
	Number of Shares		Weighted Average Award Date Fair Value		Number of Shares		Weighted Average Award Date Fair Value
			(per share)				(per share)
Outstanding at December 31, 2015	1,019,470		$	45.55	1,929,922		$	28.50
Awarded	898,916		31.67		363,256		24.80
Vested	(421,227	)	52.50		(340,410	)	42.71
Forfeited	(125,379	)	35.54		(449,776	)	37.86
Outstanding at December 31, 2016	1,371,780		$	36.37	1,502,992		$	27.43

The total fair value of restricted stock that vested was $24 million in 2016, $62 million in 2015, and $50 million in 2014.

The weighted average award-date fair value of restricted stock awarded was $29.99 per share in 2016, $35.53 per share in 2015, and $41.22 per share in 2014.

As of December 31, 2016, $32 million of compensation cost related to all of our unvested restricted stock awarded under the Plans remained to be recognized. The cost is expected to be recognized over a weighted-average period of 1.3 years years. Common stock dividends accrue on restricted stock awards and are paid upon vesting. We issue new shares of our common stock when awarding restricted stock.

Cash-Settled Awards On February 1, 2016, we issued cash-settled awards to certain employees under the 1992 Plan in lieu of a portion of restricted stock and stock options. We issued approximately one million awards (so called phantom units, the nomenclature used in accounting literature), a portion of which are subject to the Company's achievement of certain levels of total shareholder return relative to a pre-determined industry peer group. The fair value of the market based phantom unit awards was estimated on the date of award using a Monte Carlo valuation model based on the assumptions below.

These phantom units represent a hypothetical interest in the Company, and, once vested, are settled in cash. The phantom unit value at vesting will equal the lesser of the fair market value of a share of common stock of the Company as of the vesting date (2-year cliff vesting for officers and 3-year cliff vesting for non-officers) or up to four times the fair market value of a share of common stock of the Company, which was $31.65, as of the grant date.

As of December 31, 2016, we had accrued a liability of $9 million related to the phantom units.

The assumptions used in valuing market based phantom units awarded were as follows:



	Year Ended December 31,
	2016
Number of Simulations	500,000
Expected Volatility	38	%
Risk-Free Rate	0.9	%

Phantom unit activity was as follows:



	Subject to Time Vesting				Subject to Market Conditions
	Number of Units		Weighted Average Award Date Fair Value		Number of Units		Weighted Average Award Date Fair Value
			(per share)				(per share)
Outstanding at December 31, 2015	—		$	—	—		$	—
Awarded	791,000		31.65		218,180		6.82
Vested	(2,501	)	31.65		—		—
Forfeited	(76,410	)	31.65		(8,676	)	6.82
Outstanding at December 31, 2016	712,089		$	31.65	209,504		$	6.82

As of December 31, 2016, $18 million of compensation cost related to phantom units remained to be recognized. The cost is expected to be recognized over a weighted-average period of 2.0 years. The total fair value of phantom units that vested in 2016 was de minimis. Common stock dividends accrue on phantom units and will be paid upon vesting.

Other Compensation Plans

401(k) Plan We sponsor a 401(k) savings plan. All regular employees are eligible to participate. We make contributions to match employee contributions up to the first 6% of compensation deferred into the plan, and certain profit sharing contributions for employees hired on or after May 1, 2006, based upon their ages and salaries. We made cash contributions of $32 million in 2016, $35 million in 2015, and $26 million in 2014.

As a result of the termination of the pension plan, employees who were hired prior to May 1, 2006 became eligible to receive profit sharing contributions effective January 1, 2014. In addition, certain of these employees are eligible to receive transition contributions related to the termination of the plan.

Deferred Compensation Plan We have a non-qualified deferred compensation plan for which participant-directed investments are held in a rabbi trust and are available to satisfy the claims of our creditors in the event of bankruptcy or insolvency. Participants in that nonqualified deferred compensation plan may elect to receive distributions in either cash or shares of our common stock. Components of that rabbi trust are as follows:



	December 31,
(millions, except share amounts)	2016		2015
Rabbi Trust Assets
Mutual Fund Investments	$	62	$	63
Noble Energy Common Stock (at Fair Value)	26		35
Total Rabbi Trust Assets	$	88	$	98
Liability Under Related Deferred Compensation Plan	$	88	$	98
Number of Shares of Noble Energy Common Stock Held by Rabbi Trust	671,269		872,277

Assets of that rabbi trust, other than our common stock, are invested in certain mutual funds that cover an investment spectrum ranging from equities to money market instruments. These mutual funds have published market prices and are reported at fair value. See Note 13. Fair Value Measurements and Disclosures. The mutual funds are included in the mutual fund investments account in other noncurrent assets in the consolidated balance sheets.

Shares of our common stock held by the rabbi trust holding common stock are accounted for as treasury stock (recorded at cost, $16.72 per share) in the shareholders’ equity section of the consolidated balance sheets. Amounts payable to plan participants are included in other noncurrent liabilities in the consolidated balance sheets and include the market value of the shares of our common stock.

Approximately 600,000 shares, or 89%, of our common stock held in respect of one nonqualified deferred compensation plan at December 31, 2016 were attributable to a member of our Board of Directors. The shares are being distributed in equal installments over the next three years. Distributions of 200,000 shares were made in 2016, 200,000 shares in 2015 and 200,000 shares in 2014. In addition, plan participants sold 1,009 shares of our common stock in 2016, 1,009 shares in 2015, and 19,049 shares in 2014. Proceeds were invested in mutual funds and/or distributed to plan participants. Distributions to plan participants were valued at $22 million in 2016, $18 million in 2015 and $22 million in 2014.

All fluctuations in market value of the deferred compensation liability have been reflected in other non-operating (income) expense, net in the consolidated statements of operations. We recognized deferred compensation expense (income) of $11 million in 2016, $(12) million in 2015 and $(25) million in 2014.

We also maintain other nonqualified deferred compensation plans for the benefit of certain of our employees. Deferred compensation liabilities of $121 million and $119 million were outstanding at December 31, 2016 and 2015, respectively, under those other plans.