Share-Based Compensation

Chesapeake’s share-based compensation program consists of restricted stock, stock options and performance share units (PSUs) granted to employees and restricted stock granted to non-employee directors under our long term incentive plans. The restricted stock and stock options are equity-classified awards and the PSUs are liability-classified awards.

Equity-Classified Awards

Restricted Stock. We grant restricted stock units to employees and non-employee directors. A summary of the changes in unvested restricted stock during the Current Quarter is presented below.



	Shares of Unvested Restricted Stock		Weighted Average Grant Date Fair Value
	(in thousands)
Unvested restricted stock as of January 1, 2017	9,092		$	11.39
Granted	9,034		$	5.45
Vested	(3,226	)	$	14.39
Forfeited	(101	)	$	10.43
Unvested restricted stock as of March 31, 2017	14,799		$	7.12

The aggregate intrinsic value of restricted stock that vested during the Current Quarter was approximately $19 million based on the stock price at the time of vesting.

As of March 31, 2017, there was approximately $85 million of total unrecognized compensation expense related to unvested restricted stock. The expense is expected to be recognized over a weighted average period of approximately 2.25 years.

Stock Options. In the Current Quarter and the Prior Quarter, we granted members of management stock options that vest ratably over a three-year period. Each stock option award has an exercise price equal to the closing price of the Company’s common stock on the grant date. Outstanding options expire seven to ten years from the date of grant.

We utilize the Black-Scholes option pricing model to measure the fair value of stock options. The expected life of an option is determined using the simplified method. Volatility assumptions are estimated based on an average of historical volatility of Chesapeake stock over the expected life of an option. The risk-free interest rate is based on the U.S. Treasury rate in effect at the time of the grant over the expected life of the option. The dividend yield is based on an annual dividend yield, taking into account the Company's dividend policy, over the expected life of the option. The Company used the following weighted average assumptions to estimate the grant date fair value of the stock options granted in the Current Quarter.



Expected option life – years	6.0
Volatility	62.42	%
Risk-free interest rate	2.17	%
Dividend yield	—	%

The following table provides information related to stock option activity in the Current Quarter.



	Number of Shares Underlying Options		Weighted Average Exercise Price Per Share		Weighted Average Contract Life in Years	Aggregate Intrinsic Value^(a)
	(in thousands)					($ in millions)
Outstanding as of January 1, 2017	8,593		$	11.88	7.22	$	14
Granted	9,192		$	5.45
Exercised	—		$	—		$	—
Expired	(276	)	$	18.74
Forfeited	(66	)	$	5.45
Outstanding as of March 31, 2017	17,443		$	8.41	8.65	$	14

Exercisable as of March 31, 2017	4,526		$	15.69	6.50	$	3

___________________________________________


(a)	The intrinsic value of a stock option is the amount by which the current market value or the market value upon exercise of the underlying stock exceeds the exercise price of the option.

As of March 31, 2017, there was $34 million of total unrecognized compensation expense related to stock options. The expense is expected to be recognized over a weighted average period of approximately 2.71 years.

Restricted Stock and Stock Option Compensation. We recognized the following compensation costs related to restricted stock and stock options for the Current Quarter and the Prior Quarter.



	Three Months Ended March 31,
	2017		2016
	($ in millions)
General and administrative expenses	$	8	$	8
Oil and natural gas properties	4		4
Oil, natural gas and NGL production expenses	3		3
Marketing, gathering and compression expenses	—		1
Total restricted stock and stock option compensation	$	15	$	16

Liability-Classified Awards

Performance Share Units. We have granted PSUs to senior management that vest ratably over a three-year term and are settled in cash on the third anniversary of the awards. The ultimate amount earned is based on achievement of performance metrics established by the Compensation Committee of the Board of Directors, which include total shareholder return (TSR) and, for certain of the awards, operational performance goals such as finding and development costs and production levels.

For PSUs granted in 2017 and 2016, the TSR component can range from 0% to 100% and the operational component can range from 0% to 100%, resulting in a maximum payout of 200%. For PSUs granted in 2015, the TSR component can range from 0% to 100%, and each of the two operational components can range from 0% to 50% resulting in a maximum total payout of 200%. Compensation expense associated with PSU grants is recognized over the service period based on the graded-vesting method. The value of the PSU awards at the end of each reporting period is dependent upon the Company’s estimates of the underlying performance measures. The Company utilized a Monte Carlo simulation for the TSR performance measure and the following assumptions to determine the grant date fair value of the PSUs. The payout percentage for all PSU grants is capped at 100% if the Company's absolute TSR is less than zero.



Volatility	80.65	%
Risk-free interest rate	1.54	%
Dividend yield for value of awards	—	%

The following table presents a summary of our 2017, 2016 and 2015 PSU awards.



		Grant Date Fair Value		March 31, 2017
	Units	Grant Date Fair Value		Fair Value		Vested Liability
		($ in millions)
2017 Awards:
Payable 2020	1,256,295	$	8	$	8	$	1
2016 Awards:
Payable 2019	2,348,893	$	10	$	17	$	11
2015 Awards:
Payable 2018	629,694	$	13	$	2	$	2

PSU Compensation. We recognized the following compensation costs (credits) related to PSUs for the Current Quarter and the Prior Quarter.



	Three Months Ended March 31,
	2017			2016
	($ in millions)
General and administrative expenses	$	(2	)	$	2
Restructuring and other termination costs	—			1
Total PSU compensation	$	(2	)	$	3