SHARE-BASED COMPENSATION PLANS

Under the 2013 Rowan Companies plc Incentive Plan (the Plan), as amended in 2016, the Compensation Committee is authorized to grant employees and non-employee directors incentive awards up to 15,300,000 of our ordinary shares. The awards may be in the form of restricted share awards, restricted share units, options and share appreciation rights. In addition, the Compensation Committee may grant performance-based awards under the Plan (such as P-Units which may be settled in shares or cash, at the discretion of the Compensation Committee), for which the amount earned is dependent on the achievement of certain market or performance conditions over a specified period. As of December 31, 2016, there were 8,950,686 shares available for future grant under the Plan. Shares issued to satisfy awards to employees are issued from our employee benefit trust which are deemed treasury shares, while shares issued to satisfy awards to non-employee directors are newly issued shares.

Compensation cost charged to expense under all share-based incentive awards is presented below (in millions):



	2016		2015		2014
Restricted shares and restricted share units	$	21.8	$	22.5	$	23.6
Share appreciation rights	0.2		1.1		3.7
Performance-based awards	12.6		10.0		7.2
Total compensation cost	$	34.6	$	33.6	$	34.5

As of December 31, 2016, unrecognized compensation cost related to nonvested share-based compensation arrangements totaled $29.7 million, which is expected to be recognized over a weighted-average period of 1.5 years.

Restricted Shares (Employees and Non-employee Directors) – A restricted share represents an ordinary share subject to a vesting period that restricts its sale or transfer until the vesting period ends. In general, the restricted shares granted to employees vested and the restrictions lapsed in one-third increments each year over a three-year service period, or in some cases, cliff vested at the end of a three-year service period. The Company discontinued granting restricted shares as annual awards to employees beginning in 2013 and all restricted shares granted to employees were vested as of December 31, 2016.

Non-employee directors may annually elect to receive either deferred or non-deferred annual equity awards. Both deferred awards (in 2016, in the form of Director RSUs discussed in Note 2 and below) and non-deferred awards (in 2016, in the form of Director RSAs) vest at the earlier of the first anniversary of the grant date or the next annual meeting of shareholders following the grant date. Non-deferred awards (in the form of Director RSAs) are settled in shares upon vesting. In 2016, the Company granted an aggregate 54 thousand Director RSAs. Restricted share activity for the year ended December 31, 2016, is summarized below:



	Number of Shares		Weighted-average grant-date fair value per share
	(in thousands)
Nonvested at January 1, 2016	3		$	33.88
Granted	54		18.60
Vested	(3	)	33.88
Forfeited	—		—
Nonvested at December 31, 2016	54		$	18.60

The weighted-average grant date fair value of restricted shares granted in 2016 was $18.60. No restricted shares were granted in 2015 and 2014. The aggregate fair value of restricted shares that vested in 2016, 2015 and 2014 was $37 thousand, $4.1 million and $10.9 million, respectively, based on share prices on the vesting dates.

Employee Restricted Share Units – Restricted share units (RSUs) are rights to receive a specified number of ordinary shares upon vesting. RSUs granted to employees typically vest in one-third increments over a three-year service period or in some cases, cliff vest at the end of three years. Employee RSU activity for the year ended December 31, 2016, follows:



	Number of Shares		Weighted-average grant-date fair value per share
	(in thousands)
Nonvested at January 1, 2016	1,744		$	25.42
Granted	1,722		11.62
Vested	(919	)	26.50
Forfeited	(304	)	16.47
Nonvested at December 31, 2016	2,243		$	15.59

The weighted-average grant date fair value of employee RSUs granted in 2016, 2015 and 2014 was $11.62, $21.11 and $32.45, respectively. The aggregate fair value of employee RSUs that vested in 2016, 2015 and 2014 was $14.6 million, $8.9 million and $8.5 million, respectively.

Non-employee Director Restricted Share Units – As noted above, non-employee directors may annually elect to receive either deferred or non-deferred annual equity awards. Like non-deferred awards, the deferred awards (in 2016, in the form of Director RSUs) vest at the earlier of the first anniversary of the grant date or the next annual meeting of shareholders following the grant date but deferred awards are not settled (in cash, shares or a combination thereof at the discretion of the Compensation Committee) until the director terminates service from the Board.

Director RSU activity for the year ended December 31, 2016, follows:



	Number of shares		Weighted-average grant-date fair value per share
	(in thousands)
Outstanding at January 1, 2016	300		$	29.51
Granted	41		17.43
Settled	(54	)	30.64
Outstanding at December 31, 2016	287		$	27.78

Vested at December 31, 2016	246		$	29.51

The weighted-average grant date fair value of non-employee RSUs granted in 2016, 2015 and 2014 was $17.43, $20.96 and $31.10, respectively. The number and aggregate settlement-date fair value of Director RSUs settled during the year were as follows: 2016 – 54 thousand RSUs at $1.0 million; 2015 – 44 thousand RSUs at $0.9 million; 2014 – 37 thousand RSUs at $1.2 million.

Director RSUs are accounted for under the liability method. Accordingly, other long-term liabilities at December 31, 2016 and 2015, included $5.2 million and $4.7 million, respectively, related to such awards.

Performance-based Awards – The Compensation Committee may grant awards in which payment is contingent upon the achievement of certain market or performance-based conditions over a period of time specified by the Committee. Payment of such awards may be in ordinary shares or in cash as determined by the Committee.

During 2014, 2015 and 2016, the Company granted to certain members of management P-Units that have a target value of $100 per unit. The amount ultimately earned with respect to the P-Units is determined by the Company’s total shareholder return (TSR) relative to a selected group of peer companies, as defined in the award agreements, over a three-year period ending December 31, 2016, 2017 and 2018 for the 2014, 2015 and 2016 grants, respectively. The amount earned can range from zero to $200 per unit depending on performance. Twenty-five percent of the P-Units’ value is determined by the Company’s relative TSR ranking for each one-year period ended December 31 and 25% of the P-Units’ value is determined by the relative TSR ranking for the three-year period ended December 31. P-Units cliff vest and payment is made, if any, on the third anniversary following the grant date. Any employee who terminates employment with the Company prior to the third anniversary for any reason other than retirement will not receive any payment with respect to P-Units unless approved by the Compensation Committee. Settlement of the P-Units granted in 2016 may be in cash or shares at the Compensation Committee's discretion. The Compensation Committee has previously determined that any amount earned with respect to P-Units granted in 2014 and 2015 would be settled in cash.

The grant-date fair value of P-Units granted in 2016 and 2015 was estimated to be $8.6 million and $9.0 million, respectively. Fair value was estimated using the Monte Carlo simulation model, which considers the probabilities of the Company’s TSR ranking at the end of each performance period, and the amount of the payout at each rank to determine the probability-weighted expected payout. The Company uses liability accounting to account for the P-Units. Compensation is recognized on a straight-line basis over a maximum period of three years from the grant date and is adjusted for changes in fair value through the end of the performance period.

Liabilities for estimated P-Unit obligations at December 31, 2016, included $10.9 million and $12.8 million classified as current and noncurrent, respectively, compared to $7.6 million and $11.4 million classified as current and noncurrent, respectively, at December 31, 2015. Current and noncurrent estimated P-Unit liabilities are included in Accrued Liabilities, and Other Liabilities, respectively, in the Consolidated Balance Sheets.

In 2016 and 2015, we paid $7.9 million and $2.7 million, respectively, in cash to settle P-Units that vested during the year. No performance-based awards vested or settled in 2014.

Share Appreciation Rights – Share appreciation rights (SARs) give the holder the right to receive ordinary shares at no cost to the employee, or cash at the discretion of the Committee, equal in value to the excess of the market price of a share on the date of exercise over the exercise price. All SARs granted have exercise prices equal to the market price of the underlying shares on the date of grant. SARs become exercisable in one-third annual increments over a three-year service period and expire ten years following the grant date. The Company intends to share-settle any exercises of SARs and has therefore accounted for SARs as equity awards.

No SARs have been granted since 2013.

SARs activity for the year ended December 31, 2016, is summarized below:



	Number of shares under SARs		Weighted-average exercise price		Weighted-average remaining contractual term (in years)	Aggregate intrinsic value
	(in thousands)					(in millions)
Outstanding at January 1, 2016	1,615		$	30.66
Forfeited or expired	(71	)	30.53
Outstanding at December 31, 2016	1,544		$	30.67	3.1	$	0.7

Exercisable at December 31, 2016	1,544		$	30.67	3.1	$	0.7

The aggregate intrinsic value of SARs exercised in 2014 was $0.9 million. No SARs were exercised in 2016 and 2015.

Share Options – Share options granted to employees generally became exercisable in one-third or one-quarter annual increments over a three- or four-year service period at a price generally equal to the market price of the Company’s common shares on the date of grant. The Company has not granted share options since 2008. Unexercised options expire ten years after the grant date.

Share option activity for the year ended December 31, 2016, is summarized below:



	Number of shares under option		Weighted-average exercise price		Weighted-average remaining contractual term (in years)	Aggregate intrinsic value
	(in thousands)					(in millions)
Outstanding at January 1, 2016	125		$	21.02
Forfeited or expired	(25	)	43.85
Outstanding at December 31, 2016	100		$	15.31	1.9	$	0.4

Exercisable at December 31, 2016	100		$	15.31	1.9	$	0.4

No options were exercised in 2016 or 2015. The aggregate intrinsic value of options exercised in 2014 was $1.4 million.

Award modifications – In 2014, the Company accelerated the vesting of share-based awards and extended the exercise period for vested SARs held by two retiring employees whose awards would otherwise have been forfeited upon retirement. As a result of the modifications, the Company recognized additional compensation expense in 2014 in the amount of $1.7 million, net of forfeitures, which is included in selling, general and administrative expense. The Company valued the modified SARs assuming they are to be outstanding near or until such time as they expire.