Incentive Based Compensation

Description of stock-based compensation plans – The Marathon Oil Corporation 2016 Incentive Compensation Plan (the "2016 Plan") was approved by our stockholders in May 2016 and authorizes the Compensation Committee of the Board of Directors to grant stock options, SARs, stock awards (including restricted stock and restricted stock unit awards) and performance unit awards to employees. The 2016 Plan also allows us to provide equity compensation to our non-employee directors. No more than 55 million shares of our common stock may be issued under the 2016 Plan. For stock options and SARs, the number of shares available for issuance under the 2016 Plan will be reduced by one share for each share of our common stock in respect of which the award is granted. For stock awards (including restricted stock and restricted stock unit awards), the number of shares available for issuance under the 2016 Plan will be reduced by 2.41 shares for each share of our common stock in respect of which the award is granted.

Shares subject to awards under the 2016 Plan that are forfeited, terminated or expire unexercised become available for future grants. In addition, the number of shares of our common stock reserved for issuance under the 2016 Plan will not be increased by shares tendered to satisfy the purchase price of an award, exchanged for other awards or withheld to satisfy tax withholding obligations. Shares issued as a result of awards granted under the 2016 Plan are generally funded out of common stock held in treasury, except to the extent there are insufficient treasury shares, in which case new common shares are issued.

After approval of the 2016 Plan, no new grants were or will be made from any prior plans. Any awards previously granted under any prior plans shall continue to be exercisable in accordance with their original terms and conditions.

Stock-based awards under the plans

Stock options – We grant stock options under the 2016 Plan. Our stock options represent the right to purchase shares of our common stock at its fair market value on the date of grant. In general, our stock options vest ratably over a three-year period and have a maximum term of ten years from the date they are granted.

SARs – At December 31, 2018, there are no SARs outstanding.

Restricted stock – We grant restricted stock under the 2016 Plan. The restricted stock awards granted to officers generally vest three years from the date of grant, contingent on the recipient’s continued employment. We also grant restricted stock to certain non-officer employees based on their performance within certain guidelines and for retention purposes. The restricted stock awards to non-officers generally vest ratably over a three-year period, contingent on the recipient’s continued employment. Prior to vesting, all restricted stock recipients have the right to vote such stock and receive dividends thereon. The non-vested shares of restricted stock are not transferable and are held by our transfer agent.

Stock-based performance units – We grant stock-based performance units to officers under the 2016 Plan. At the grant date, each unit represents the value of one share of our common stock. These units are settled in cash, and the amount of the payment is based on (1) the vesting percentage, which can be from zero to 200% based on performance achieved and as determined by the Compensation Committee of the Board of Directors and (2) the fair market value of our common stock on the last day of the performance period. The performance goals are tied to our total shareholder return (“TSR”) as compared to TSR for a group of peer companies determined by the Compensation Committee of our Board of Directors. Dividend equivalents may accrue during the performance period and would be paid in cash at the end of the performance period based on the number of shares that would represent the value of the units granted multiplied by the vesting percentage.

Restricted stock units – We maintain an equity compensation program for our non-employee directors. All non-employee directors receive annual grants of common stock units. Any units granted prior to 2012 must be held until completion of board service, at which time the non-employee director will receive common shares. For units granted between 2012 and 2016, common shares will generally vest following completion of board service or three years from the date of grant, whichever is earlier. For awards issued in 2017 and later, directors may elect to defer settlement of their common stock units until after they cease serving on the Board. Absent such an election to defer, common shares will vest upon the earlier of three years from the date of grant or completion of board service. We also grant restricted stock units to certain non-officer international employees which generally vest ratably over a three-year period, contingent on the recipient's continued employment. Grants of restricted stock units to these non-officer international employees are based on their performance and for retention purposes. Common shares will be issued for these restricted stock units after vesting. Prior to vesting, recipients of restricted stock units typically receive dividend equivalent payments, but they may not vote.

Total stock-based compensation expense – Total employee stock-based compensation expense was $53 million, $50 million and $51 million in 2018, 2017 and 2016, while the total related income tax benefits were $19 million in 2016. Due to the full valuation allowance on our net federal deferred tax assets, we realized no tax benefit during 2018 and 2017. In 2018 and 2016, cash received upon exercise of stock option awards was $26 million and $1 million. There was no cash received upon exercise of stock option awards for 2017. There were no tax benefits realized for deductions for stock awards settled during 2018, 2017 and 2016.

Stock option awards – During 2018, 2017 and 2016 we granted stock option awards to officer employees. The weighted average grant date fair value of these awards was based on the following weighted average Black-Scholes assumptions:



	2018		2017		2016
Exercise price per share	$14.52		$15.80		$7.22
Expected annual dividend yield	1.4	%	1.3	%	2.8	%
Expected life in years	6.45		6.4		6.3
Expected volatility	43	%	42	%	36	%
Risk-free interest rate	2.8	%	2.1	%	1.4	%
Weighted average grant date fair value of stock option awards granted	$5.83		$6.07		$1.97

The following is a summary of stock option award activity in 2018.



	Number	Weighted Average	Weighted Average Remaining	Aggregate Intrinsic Value
	of Shares	Exercise Price	Contractual Term	(in millions)
Outstanding at beginning of year	10,330,776	$25.52
Granted	856,890	$14.52
Exercised	(1,878,836)	$14.02
Canceled	(3,128,823)	$31.64
Outstanding at end of year	6,180,007	$24.39	5 years	$	4
Exercisable at end of year	4,523,008	$28.46	3 years	$	1
Expected to vest	1,635,216	$13.25	8 years	$	3

The intrinsic value of stock option awards exercised during 2018 was $13 million while it was immaterial during 2017 and 2016.

As of December 31, 2018, unrecognized compensation cost related to stock option awards was $5 million, which is expected to be recognized over a weighted average period of one year.

Restricted stock awards and restricted stock units – The following is a summary of restricted stock and restricted stock unit award activity in 2018.



	Awards		Weighted Average Grant Date Fair Value
Unvested at beginning of year	7,572,845		$14.24
Granted	4,817,577		$14.82
Vested and Exercised	(3,003,321	)	$15.79
Canceled	(882,155	)	$14.06
Unvested at end of year	8,504,946		$14.04

The vesting date fair value of restricted stock awards which vested during 2018, 2017 and 2016 was $48 million, $39 million and $20 million. The weighted average grant date fair value of restricted stock awards was $14.04, $14.24 and $14.44 for awards unvested at December 31, 2018, 2017 and 2016.

As of December 31, 2018 there was $74 million of unrecognized compensation cost related to restricted stock awards which is expected to be recognized over a weighted average period of one year.

Stock-based performance unit awards – During 2018, 2017 and 2016 we granted 754,140, 563,631 and 1,205,517 stock-based performance unit awards to officers. At December 31, 2018, there were 1,196,176 units outstanding. Total stock-based performance unit awards expense was $13 million in 2018, $8 million in 2017 and $6 million in 2016.

The key assumptions used in the Monte Carlo simulation to determine the fair value of stock-based performance units granted in 2018, 2017 and 2016 were:



	2018		2017		2016
Valuation date stock price	$14.17		$14.17		$14.17
Expected annual dividend yield	1.4	%	1.4	%	1.4	%
Expected volatility	39	%	43	%	52	%
Risk-free interest rate	2.5	%	2.6	%	2.4	%
Fair value of stock-based performance units outstanding	$19.60		$19.45		$21.51