Note 22 — Employee Compensation and Benefit Plans

We maintain defined contribution plans to provide post-retirement benefits to our eligible employees and non-contributory defined benefit pension plans which are frozen and cover certain former eligible employees. We also maintain additional incentive compensation plans for certain employees. We designed these plans to facilitate a pay-for-performance culture, further align the interests of our officers and key employees with the interests of our shareholders and to assist in attracting and retaining employees vital to our long-term success. These plans are summarized below.

Defined Contribution Savings Plans

We sponsor defined contribution savings plans for eligible employees in the U.S (401(k) plan) and India (Provident Fund). Effective July 1, 2019, the PHH Corporation Employee Savings Plan and the PHH Home Loans, LLC Employee Savings Plan were merged into the Ocwen Financial Corporation 401(k) Savings Plan which applied to all current and former employees with account balances as of the date of the merger.

Contributions of participating employees to the plans are matched on the basis specified by these plans. For the 401(k) plans, we match 50% of the first 6% of each eligible participant’s contribution to the 401(k) plans with maximum aggregate matching of $8,400 for 2019. For the Provident Fund, both the employee and the employer are required to make minimum contributions to the fund at a predetermined rate (currently 12%) applied to a portion of the employee's salary. Employers are not required to make contributions beyond this minimum.

Our contributions to these plans were $5.9 million, $4.8 million and $5.3 million for the years ended December 31, 2019, 2018 and 2017, respectively.

Defined Benefit Pension Plans

Ocwen sponsors different non-contributory defined benefit pension plans for which benefits are based on an employee’s years of credited service and a percentage of final average compensation, or as otherwise described by the plan. Both defined benefit pension plans were assumed as part of business acquisitions and are frozen, wherein the plans only accrue additional benefits for a limited number of employees and no additional employees are eligible for participation in the plans.

The following table shows the total change in the benefit obligation, plan assets and funded status for the pension plans:



	December 31,
	2019			2018
Benefit obligation	$	54,603		$	49,122
Fair value of plan assets	41,220			36,439
Unfunded status recognized in Other liabilities	$	(13,383	)	$	(12,683	)

Amounts recognized in Accumulated other comprehensive income	$	6,864		$	3,422

The net periodic benefit cost related to the defined benefit pension plans, included in Other expenses, was $(2.0) million and $0.4 million for 2019 and 2018, respectively, and insignificant for 2017.

As of December 31, 2019, future expected benefit payments to be made from the assets of the defined benefit pension plans is $2.9 million for the year ending December 31, 2020, $2.8 million for the years ending December 31, 2021 through 2023 and $3.1 million for the year ending December 31, 2024. The expected benefit payments to be made for the subsequent five years ending December 31, 2025 through 2029 are $15.7 million.

Ocwen contributes to the defined benefit pension plans amounts sufficient to meet minimum funding requirements as set forth in employee benefit and tax laws as well as additional amounts at their discretion. Our contributions to the defined benefit pension plans were $0.8 million, $0.2 million and $0.1 million for the years ended December 31, 2019, 2018 and 2017, respectively. On October 4, 2018, Ocwen assumed all benefit obligations associated with PHH’s defined benefit pension plan as a result of its completed acquisition of PHH and no contribution was required to be made during the post-acquisition period ended December 31, 2018.

Gratuity Plan

In accordance with India law, OFSPL provides for a defined benefit retirement plan (Gratuity Plan) covering all of its employees in India. The Gratuity Plan provides a lump-sum payment to vested employees at retirement or termination of employment based upon the respective employee’s salary and years of employment. OFSPL provides for the gratuity benefit through actuarially determined valuations.

The following table shows the total change in the benefit obligation, plan assets and funded status for the Gratuity Plan:



	December 31,
	2019			2018
Benefit obligation	$	5,370		$	4,941
Fair value of plan assets	39			37
Unfunded status recognized in Other liabilities	$	(5,331	)	$	(4,904	)

During the years ended December 31, 2019 and 2018, benefits of $0.9 million and $0.3 million were paid by OFSPL. As of December 31, 2019, future expected benefit payments to be made from the assets of the Gratuity Plan, which reflect expected future service, is $1.0 million, $0.9 million, $0.8 million, $0.7 million and $0.6 million for the years ending December 31, 2020, 2021, 2022, 2023 and 2024, respectively. The expected benefit payments to be made for the subsequent five years ending December 31, 2025 through 2029 are $1.9 million.

Annual Incentive Plan

The Ocwen Financial Corporation Amended 1998 Annual Incentive Plan and the 2017 Performance Incentive Plan (the 2017 Equity Plan) are our primary incentive compensation plans for executives and other eligible employees. Previously issued equity awards remain outstanding under the 2007 Equity Incentive Plan (the 2007 Equity Plan). Under the terms of these plans, participants can earn cash and equity-based awards as determined by the Compensation and Human Capital Committee of the Board of Directors (the Committee). The awards are based on objective and subjective performance criteria established by the Committee. The Committee may at its discretion adjust performance measurements to reflect significant unforeseen events. We recognized $16.6 million, $20.5 million and $24.5 million of compensation expense during 2019, 2018 and 2017, respectively, related to annual incentive compensation awarded in cash.

The 2007 Equity Plan and the 2017 Equity Plan authorize the grant of stock options, restricted stock, stock units or other equity-based awards, including cash-settled awards, to employees. Effective with the approval of the 2017 Equity Plan by Ocwen shareholders on May 24, 2017, no new awards will be granted under the 2007 Equity Plan. The number of remaining shares available for award grants under the 2007 Equity Plan became available for award grants under the 2017 Equity Plan effective upon shareholder approval. At December 31, 2019, there were 6,841,386 shares of common stock remaining available for future issuance under these plans.

Equity Awards

Outstanding equity awards granted under the 2007 Equity Plan and the 2017 Equity Plan had the following characteristics in common:



Type of Award	Percent of Total Equity Award		Vesting Period
2011 - 2014 Awards:
Options:
Service Condition:
Time-based	60	%	Ratably over four years (25% on each of the four anniversaries of the grant date)
Market Condition:
Market performance-based	35		Over three years beginning with 25% vesting on the date that the stock price has at least doubled over the exercise price and the compounded annual gain over the exercise price is at least 20% and then ratably over three years (25% on each of the next three anniversaries of the achievement of the market condition)
Extraordinary market performance-based	5		Over three years beginning with 25% vesting on the date that the stock price has at least tripled over the exercise price and the compounded annual gain over the exercise price is at least 25% and then ratably over three years (25% on each of the next three anniversaries of the achievement of the market condition)
Total Award	100	%



Type of Award	Percent of Total Equity Award		Vesting Period
2015 - 2016 Awards:
Options:
Service Condition:
Time-based	34	%	Ratably over four years (25% vesting on each of the first four anniversaries of the grant date.)
Stock Units:
Service Condition:
Time-based	—		Over four years with 1/3 vesting on each of the 2^nd, 3^rd and 4^th anniversaries of the grant date.
Market Condition:
Time-based vesting schedule and Market performance-based vesting date	66		Vest over four years with 25% vesting on each of the four anniversaries of the grant date. However, none are considered vested until the first trading day (if any) on or before the 4^th anniversary of the award date on which the average stock price equals or exceeds the price set in the individual award agreement, at which time all units that have met their time-based vesting schedule vest immediately with the remainder vesting in accordance with their time-based schedule.
Total Award	100	%

2017 - 2019 Awards:
Options:
Service Condition:
Time-based	15	%	Ratably over three years (1/3 vesting on each of the first three anniversaries of the grant date).
Stock Units:
Service Condition:
Time-based	56		Over three years with 1/3 vesting on each of the first three anniversaries of the grant date.
Market Condition:
Time-based vesting schedule and Market performance-based vesting date	29		Vest over four years with 25% vesting on each of the four anniversaries of the grant date. However, none are considered vested until the first trading day (if any) on or before the 4^th anniversary of the award date on which the average stock price equals or exceeds the price set in the individual award agreement, at which time all units that have met their time-based vesting schedule vest immediately with the remainder vesting in accordance with their time-based schedule.
Total Award	100	%

The contractual term of all options granted is ten years from the grant date, except where employment terminates by reason of death, disability or retirement, in which case, the agreement may provide for an earlier termination of the options. The terms of the market-based options do not include a retirement provision. Stock units have a three-year or four-year term. If the market conditions are not met by the third or fourth anniversary of the award of stock units, those units terminate on that date.



	Years Ended December 31,
Stock Options	2019				2018				2017
	Number of Options		Weighted Average Exercise Price		Number of Options		Weighted Average Exercise Price		Number of Options		Weighted Average Exercise Price
Outstanding at beginning of year	2,092,599		$	19.22	6,708,655		$	9.97	6,926,634		$	9.88
Granted (1) (2)	51,409		2.08		348,385		3.66		—		—
Exercised	—		—		—		—		—		—
Forfeited / Expired (3)	(164,577	)	18.69		(4,964,441	)	5.62		(217,979	)	7.16
Outstanding at end of year (4)(5)	1,979,431		$	18.82	2,092,599		$	19.22	6,708,655		$	9.97

Exercisable at end of year (4)(5)(6)	1,580,766		$	20.16	1,520,039		$	21.29	6,234,830		$	8.87

(1)

Stock options granted in 2019 include 33,180 options awarded to Ocwen’s Chief Financial Officer at a strike price of $2.17 equal to the closing price of our common stock on the effective date of her employment. Stock options granted in 2018 include 266,990 options awarded to Ocwen’s current Chief Executive Officer (CEO) at an exercise price of $4.12 equal to the closing price of our common stock on the effective date of his employment, which was the closing date of the PHH acquisition.


(2)	The weighted average grant date fair value of stock options granted in 2019 was $1.49.


(3)	Includes 73,696 and 4,719,750 options which expired unexercised in 2019 and 2018, because their exercise price was greater than the market price of Ocwen’s stock.


(4)	At December 31, 2019, 115,000 options with a market condition for vesting based on an average common stock trading price of $38.41, had not met their performance criteria. Outstanding and exercisable stock options at December 31, 2019 have a net aggregate intrinsic value of $0. A total of 810,939 market-based options were outstanding at December 31, 2019, of which 695,939 were exercisable.


(5)	At December 31, 2019, the weighted average remaining contractual term of options outstanding and options exercisable was 4.13 years and 3.28 years, respectively.


(6)	The total fair value of stock options that vested and became exercisable during 2019, 2018 and 2017, based on grant-date fair value, was $0.6 million, $0.6 million and $0.7 million, respectively.



	Years Ended December 31,
Stock Units - Equity Awards	2019				2018				2017
	Number of Stock Units		Weighted Average Grant Date Fair Value		Number of Stock Units		Weighted Average Grant Date Fair Value		Number of Stock Units		Weighted Average Grant Date Fair Value
Unvested at beginning of year	2,946,800		$	3.75	2,753,918		$	3.69	2,752,054		$	3.91
Granted (1)(2)	1,256,952		2.00		1,809,373		3.57		971,761		2.56
Vested (3)(4)	(1,137,696	)	3.08		(796,856	)	2.78		(896,272	)	3.26
Forfeited/Cancelled (1)	(406,931	)	9.58		(819,635	)	4.57		(73,625	)	2.20
Unvested at end of year (5)(6)	2,659,125		$	2.63	2,946,800		$	3.75	2,753,918		$	3.69


(1)	Upon the resignation of Ocwen’s former CEO on June 30, 2018, 377,525 unvested stock units which would have been forfeited immediately were modified to allow continued vesting in accordance with the original terms. This had the equivalent effect of canceling the original award and granting a new award.


(2)	Stock units granted in 2019 include 1,130,653 units granted to Ocwen’s CEO under the new long-term incentive (LTI) program described below. Stock units granted in 2018 include 983,010 units granted to Ocwen’s current CEO on the effective date of his employment, which was the closing date of the PHH acquisition.


(3)	The total intrinsic value of stock units vested, which is defined as the market value of the stock on the date of vesting, was $2.1 million, $3.3 million and $4.6 million for 2019, 2018 and 2017, respectively.


(4)	The total fair value of the stock units that vested during 2019, 2018 and 2017, based on grant-date fair value, was $3.5 million, $2.2 million and $2.9 million, respectively.

(5)

Excluding the 787,204 market-based stock awards that have not met their performance criteria, the net aggregate intrinsic value of stock awards outstanding at December 31, 2019 was $2.6 million. At December 31, 2019, 40,000, 93,023, 57,604, and 31,250 stock units with a market condition for vesting based on an average common stock trading price of $11.72, $5.80, $4.34, and $3.84 respectively, as well as 565,327 stock units requiring an average common stock trading price of $2.56 to vest a minimum of 50% of units, had not yet met the market condition (and time-vesting requirements, where applicable).


(6)	At December 31, 2019, the weighted average remaining contractual term of share units outstanding was 1.88 years.

Liability Awards

In 2019, Ocwen established a long-term incentive (LTI) program in connection with changes made by the Committee to the compensation structure of Ocwen’s executives. The LTI program is designed to promote actions and decisions aligned with our strategic objectives and reward our executives and other program participants for long-term value creation for our shareholders in a manner that is consistent with our pay-for-performance philosophy. The 2019 awards granted under the LTI program are cash-settled to avoid share dilution, except that a portion of awards to Ocwen’s Chief Executive Officer will be settled in shares of common stock. The program includes both a time-vesting component for retention purposes and a performance component to align with pay-for-performance objectives, using absolute total shareholder return as the performance metric. The LTI awards are granted under the 2017 Equity Plan. A total of 4,896,796 awards were granted in 2019 under the LTI, of which 3,766,143 were cash-settled awards and 1,130,653 were equity-settled awards granted to Ocwen’s CEO as disclosed above.

Of the awards granted under the LTI program in 2019, 74% were performance-based with a market condition and the remaining 26% were time-based. The time-based awards vest equally (one-third) on the first, second and third anniversaries of the award grant date if the continued employment condition is met. The recurring annual performance-based awards cliff-vest 100% after three years subject to meeting the performance conditions and continuing employment. Certain one-time retention and transitional performance-based awards granted in 2019 vest equally (one-third) on the first, second and third anniversaries of the award grant date subject to meeting the performance conditions and continuing employment. Because the cash-settled awards must be settled in cash, they are classified as liabilities (Other liabilities) in the consolidated balance sheets and remeasured at fair value at each reporting date with adjustments recorded as Compensation expense in the consolidated statements of operations.



Stock Units - Liability Awards	Year Ended December 31, 2019
Unvested units at beginning of year	—
Granted	3,766,143
Vested	—
Forfeited/Cancelled	114,528
Unvested units at end of year	3,651,615

The performance-based awards vest in separate tranches based on the total shareholder return (TSR), as defined, over one, two and three-year annual performance periods ending March 29, 2020, 2021 and 2022. TSR is calculated using the average closing stock prices during the 30 trading days up to and including the beginning and end date of each performance period. The number of units earned depends on the level of performance achieved (Threshold = 50%; Target = 100%; Maximum = 200%, with results between levels interpolated). No units will be awarded for performance below the Threshold level.

Compensation expense related to all stock-based awards is initially measured at fair value on the grant date using an appropriate valuation model based on the vesting conditions of the awards. Awards classified as liabilities are subsequently remeasured at fair value at each reporting date, as described above. The fair value of the time-based option awards was determined using the Black-Scholes options pricing model, while a lattice (binomial) model was used to determine the fair value of the market-based option awards. Lattice (binomial) models incorporate ranges of assumptions for inputs. Stock unit awards with only a service condition are valued at their intrinsic value, which is the market value of the stock on the date of the award. The fair value of Stock unit awards with both a service condition and a market-based vesting condition is based on the output of a Monte Carlo simulation.

The following assumptions were used to value awards:



	Years Ended December 31,
	2019		2018		2017
	Black-Scholes	Monte Carlo	Black-Scholes	Monte Carlo	Monte Carlo
Risk-free interest rate	2.60%	1.16% - 2.40%	2.79% – 3.14%	1.15% – 1.18%	1.12% – 1.18%
Expected stock price volatility (1)	68%	72.5% - 75.9%	67%	71% - 74%	71% - 77%
Expected dividend yield	—%	—%	—%	—%	—%
Expected life (in years) (2)	8.5	(3)	8.5	(3)	(3)
Contractual life (in years)	N/A	N/A	N/A	N/A	N/A
Fair value	$1.37 - $1.55	$1.75 - $2.25	$1.53 - $2.96	$1.84 - $4.80	$2.00 - $4.80


(1)	We generally estimate volatility based on the historical volatility of Ocwen’s common stock over the most recent period that corresponds with the estimated expected life of the option. For awards valued using a Monte Carlo simulation, volatility is computed as a blend of historical volatility and implied volatility based on traded options on Ocwen’s common stock.

(2)

For the options valued using the Black-Scholes model we determined the expected life based on historical experience with similar awards, giving consideration to the contractual term, exercise patterns and post vesting forfeitures. The expected term of the options valued using the lattice (binomial) model is derived from the output of the model. The lattice (binomial) model incorporates exercise assumptions based on analysis of historical data. For all options, the expected life represents the period of time that options granted were expected to be outstanding at the date of the award.

(3)

The stock units that contain both a service condition and a market-based condition are valued using the Monte Carlo simulation. The expected term is derived from the output of the simulation and represents the expected time to meet the market-based vesting condition. For equity awards with both service and market conditions, the requisite service period is the longer of the derived or explicit service period. In this case, the explicit service condition (vesting period) is the requisite service period, and the graded vesting method is used for expense recognition.

The following table summarizes Ocwen's stock-based compensation expense included as a component of Compensation and benefits expense in the consolidated statements of operations:



	Years Ended December 31,
	2019			2018			2017
Compensation expense - Equity awards
Stock option awards	$	(121	)	$	(368	)	$	1,457
Stock awards	2,818			2,734			4,167
	2,697			2,366			5,624
Compensation expense - Liability awards	1,082			—			—
(Tax deficiency) excess tax benefit related to share-based awards	(381		)	294			3,701

As of December 31, 2019, unrecognized compensation costs related to non-vested stock options amounted to $0.6 million, which will be recognized over a weighted-average remaining requisite service period of 1.80 years. Unrecognized compensation costs related to non-vested stock units as of December 31, 2019 amounted to $5.5 million, which will be recognized over a weighted-average remaining life of 1.88 years. Unrecognized compensation costs related to unvested liability awards as of December 31, 2019 amounted to $3.1 million, which will be recognized over a weighted-average remaining life of 2.34 years.