Share-Based Compensation

The Company's current long-term incentive compensation plan, which was originally adopted in 2006 and amended in 2009, 2013 and 2018, is known as the Tenneco Inc. 2006 Long-Term Incentive Plan (2006 LTIP). The types of awards that may be granted under the 2006 LTIP are stock-options (both incentive and non-qualified stock options), stock appreciation rights (SARs), Full Value Awards (including bonus stock, stock units, restricted stock, restricted stock units (RSUs), deferred stock units, performance stock, and performance stock units (PSUs), and cash incentive awards (including long-term performance units (LTPUs) and cash settled RSUs).

On September 12, 2018, the stockholders of the Company approved an amendment to the 2006 LTIP to increase the shares of common stock available thereunder to 3.0 million. Share-settled awards are settled through the issuance of new shares of Class A Common Stock. As of December 31, 2018, up to 14.8 million shares of the Company's Class A Common Stock are authorized to be issued under its 2006 LTIP, of which approximately 4,034,413 shares remain authorized for granting under the plan.

In 2018, the Company prospectively changed its vesting policy regarding retirement eligibility and now require a retirement eligible employee (or an employee who becomes retirement eligible) to provide at least one year of service from the grant date in order for the award to vest. If an employee becomes retirement eligible after the first year of vesting but before completion of the three-year term, the Company amortizes the expense for the share-based awards over a period starting at the grant date to the date an employee becomes retirement eligible. Prior to 2018, for employees eligible to retire at grant date, the Company immediately expensed the granted awards.

Director restricted stock awards generally vest on the date of grant. Stock options, RSUs (both cash-settled and share-settled) and restricted stock are time-based service awards and generally vest according to a three-year graded vesting schedule. One-third of the award will vest on the first anniversary of the grant date, one-third of the award will vest on the second anniversary and one-third of the award will vest on the third anniversary.

LTPU and PSU awards generally have a three-year performance period and cliff vest at the end of the period based upon achievement of performance and market targets established at the time of grant. Generally 50% of the award is based on performance targets and 50% is based on market targets. The market target for both LTPUs and PSU is Company total shareholder return (TSR) percentile ranking among peer companies with TSR defined as change in stock price plus dividends paid divided by beginning stock price. The LTPUs have two performance targets, Cumulative EBITDA and Cumulative free cash flow, which are defined in the award. The PSUs have one performance target, Cumulative economic value added, which is defined in the award.

Director restricted stock, restricted stock and RSUs (cash-settled and share-settled) will participate in any dividends during the vesting period, which are subject to the same vesting terms of the award. The dividends are generally paid in cash on the settlement date of the award.

The fair value of restricted stock and RSUs (cash-settled and share-settled) are determined using the average of the high and low trading price of our common stock on the date of measurement. The fair value of LTPU’s and PSUs are determined using the probability weighted factors for performance conditions combined with Monte Carlo simulation model for market conditions. The Monte Carlo model utilizes multiple input variables that determine the probability of satisfying the market condition stipulated in the award and calculated the fair value of the award. The starting stock price is based on the trailing 20-day closing stock price as of the beginning of the performance period and the closing stock price on the valuation date, as well as the respective stock prices for component companies. The risk-free rate is based on yields observed on the U.S. Treasury constant maturity notes with a term equal to the remaining term of the award being measured. Expected volatilities utilized in the model are based on historical volatility of the Company and the companies in the S&P 500 index using daily stock price returns prior to the valuation date, commensurate with the remaining performance period at the measurement date. The cross correlation among stock price returns of the Company and each of the component companies in the S&P 500 with the S&P 500 Index are calculated based on daily returns over the trailing period commensurate with the remainder of the performance period at the valuation date.

For our restricted stock, share-settled RSUs and PSUs that have not yet vested, we estimate forfeitures by taking the average of the past actual forfeiture rate for these grants.

Cash-Settled Awards

Prior to 2018, the Company has granted RSUs and LTPUs to certain key employees that are payable in cash. These awards are classified as liabilities and are valued based on the fair value of the award at the grant date and are remeasured at each reporting date until settlement with compensation expense being recognized in proportion to the completed requisite period up until date of settlement. At December 31, 2018, the LTPUs outstanding included a three-year grant for 2016-2018 payable in the first quarter of 2019, and a three-year grant for 2017-2019 payable in the first quarter of 2020.

Total share-based compensation expense (net of taxes) for the cash-settled awards was a benefit of $1 million in 2018, and an expense of $4 million and $10 million in 2017 and 2016, respectively. Share-based compensation expense is included in selling, general and administrative expenses in the consolidated statements of income. As of December 31, 2018, $2 million of total unrecognized compensation costs is expected to be recognized on the cash-settled awards over a weighted-average period of approximately 1 year.

Share-Settled Awards

The Company has granted restricted stock and stock options to its directors and certain key employees. In addition, beginning in 2018, the Company has granted RSUs and PSUs that are payable in common stock to certain key employees. These awards are settled in shares upon vesting with compensation expense being recognized based on the grant date fair value recognized ratably over the requisite service period if it is probable that the performance target related to the PSUs will be achieved and subsequently adjusted if the probability assessment changes.

Total share-based compensation expense (net of taxes) for the share-settled awards for the years ended December 31, 2018, 2017, and 2016 was $11 million, $11 million and $9 million, respectively. Share-based compensation expense is included in selling, general and administrative expenses in the consolidated statements of income.

Stock Options

The Company's nonqualified stock options generally have seven-year terms. There have been no stock options granted since 2014 and all options are currently vested. As such, there was no unrecognized compensation cost related to the Company's stock option awards as of December 31, 2018.

The following table reflects the status and activity for all options to purchase common stock for the period indicated:



	Year Ended December 31, 2018
	Shares Under Option		Weighted Avg. Exercise Prices		Weighted Avg. Remaining Life in Years	Aggregate Intrinsic Value
						(Millions)
Options outstanding, January 1, 2018	318,016		$	46.18	2.3	$	5
Granted	—		—
Exercised	(21,823	)	29.79
Forfeited/expired	(2,196	)	55.50
Options outstanding, December 31, 2018	293,997		46.89		1.4	$	—

Cash received from stock option exercises was $1 million in 2018, $8 million in 2017, and $16 million in 2016. Stock options exercised generated a tax shortfall of less than $1 million in 2018, and an excess tax benefit of $2 million in 2017 and $1 million in 2016.

As of December 31, 2018, all outstanding options are exercisable. The total intrinsic value of options exercised during the years ended December 31, 2018, 2017, and 2016 was less than $1 million, $6 million and $11 million, respectively.

As mentioned above, there have been no stock options granted since 2014. Accordingly, no options vested in 2018. The total fair value of shares vested from options that were granted prior to 2015 was $2 million in 2017 and $4 million in 2016.

Restricted Stock, Share-Settled RSUs and PSUs

The following table reflects the status for all nonvested restricted stock, share-settled RSUs and PSUs for the period indicated:



	Restricted Stock				Share-Settled RSUs				PSUs
	Shares		Weighted Avg. Grant Date Fair Value		Units		Weighted Avg. Grant Date Fair Value		Units		Weighted Avg. Grant Date Fair Value
Nonvested balance at January 1, 2018	410,251		$	53.36	—		$	—	—		$	—
Granted	19,727		54.19		467,358		48.48		248,928		49.32
Vested	(237,342	)	51.17		(192	)	55.04		—		—
Forfeited	(14,086	)	60.87		(26,763	)	55.04		(21,879	)	50.75
Nonvested balance at December 31, 2018	178,550		55.46		440,403		47.99		227,049		49.18

At December 31, 2018, the PSUs outstanding represent a three-year grant for 2018-2020 payable in the first quarter of 2021.

The total fair value of restricted stock vested was $11 million in 2018, $14 million in 2017, and $9 million in 2016.

As of December 31, 2018, approximately $25 million of total unrecognized compensation costs is expected to be recognized on the share-settled awards over a weighted-average period of approximately two years.