8.	Employee Stock Plans

Upon the issuance of Host Inc.’s common stock under either of the two stock-based compensation plans described below, Host L.P. will issue to Host Inc. common OP units of an equivalent value. Accordingly, these awards and related disclosures are included in both Host Inc.’s and Host L.P.’s consolidated financial statements.

Host Inc. maintains two stock-based compensation plans, the Comprehensive Stock and Cash Incentive Plan (the “2009 Comprehensive Plan”), under which Host Inc. may award to participating employees its common stock and options to purchase our common stock, and the Employee Stock Purchase Plan (“ESPP”). At December 31, 2016, there were approximately 14 million shares of Host Inc.’s common stock reserved and available for issuance under the 2009 Comprehensive Plan.

We recognize costs resulting from share-based payments in our financial statements over their vesting periods. No compensation cost is recognized for awards for which employees do not render the requisite services. We classify share-based payment awards granted in exchange for employee services as either equity-classified or liability-classified awards. Equity-classified awards are measured based on their fair value as of the date of grant. In contrast, liability-classified awards are re-measured to fair value each reporting period.

During 2016, 2015 and 2014, we recorded stock-based compensation expense of approximately $12 million, $11 million and $22 million, respectively. Shares granted in 2016, 2015 and 2014 totaled 2.3 million, 1.8 million and 2.0 million, respectively, while 1.2 million, 0.8 million and 1.3 million shares, respectively, vested during those years.

Senior Executive Plan

During 2016, Host Inc. granted 1.6 million shares of restricted stock awards and 0.6 million shares of stock option awards, to senior executives (the “Annual Plan”), which amount represents the maximum number of shares that can be earned during the year if performance is at the “high” level of achievement. The stock option awards have an average exercise price of $14.26 per share for performance year 2016. The restricted stock awards and stock option awards vest on an annual basis; therefore, no unvested awards were outstanding at December 31, 2016.

Restricted stock awards

Vesting of restricted stock awards is based on (1) the achievement of relative total shareholder return (“TSR”) and (2) the company and personal performance of employees attributable to specific management business objectives. Approximately 50% of the restricted stock awards are based on the satisfaction of the TSR compared to (i) the NAREIT index, (ii) the Standard & Poor’s index, and (iii) a Selected Lodging Company index that serves as a relevant industry/asset specific measurement to our competitors, with the remaining 50% based on the achievement of management business objectives. Restricted stock awards granted to U.S. senior executives are classified as liability awards, due to settlement features that allow the recipient to have a percentage of the restricted stock awards withheld to meet income tax requirements in excess of the statutory minimum income tax withholding requirements. The fair value of these shares is adjusted at each balance sheet date and, at year end, is equal to the number of shares earned during the year at the December 31, 2016 stock price. Of the awards granted in 2016, 99% were classified as liability awards. In contrast, restricted stock awards granted to senior executives operating out of our international offices do not have this settlement feature and are considered equity-classified awards. The fair value of these equity-classified awards is based on the fair value on the grant date, and is not adjusted for subsequent movements in fair value.

During 2016, 2015 and 2014, we recorded compensation expense of approximately $10 million, $8 million and $18 million, respectively, related to the restricted stock awards to senior executives. The following table is a summary of the status of our senior executive plans for the three years ended December 31, 2016:

	Year ended December 31,
	2016					2015					2014
	Shares			Fair Value		Shares			Fair Value		Shares			Fair Value
	(in millions)			(per share)		(in millions)			(per share)		(in millions)			(per share)
Balance, at beginning of year		—		$	—		—		$	—		—		$	—
Granted		1.6			18		1.3			16		1.5			18
Vested⁽¹⁾		(0.6	)		19		(0.4	)		15		(0.8	)		24
Forfeited/expired		(1.0	)		19		(0.9	)		15		(0.7	)		24
Balance, at end of year		—			—		—			—		—			—
Issued in calendar year ⁽¹⁾		0.2			15		0.5			24		0.4			19
___________

(1)

Shares that vest at December 31 of each year are issued to the employees in the first quarter of the following year, although the requisite service period is complete. Accordingly, the 0.2 million shares issued in 2016 include shares vested at December 31, 2015, after adjusting for shares withheld to meet employee tax requirements. The shares withheld for employee tax requirements were valued at $2.4 million, $9.8 million and $6.1 million for 2016, 2015 and 2014, respectively.

Stock Option Awards

As of December 31, 2016, 1.3 million shares of stock option awards were outstanding and exercisable, with a weighted average remaining life of 8 years and a weighted average exercise price of $17.78 per share. During 2016, 2015 and 2014, stock option grants totaled 596,000, 366,000 and 393,000, respectively. Stock option compensation expense was $1.5 million for 2016, and $1.8 million for each of 2015 and 2014, and all stock option awards outstanding as of December 31, 2016 were fully vested. The stock option awards are equity-classified awards, as they do not include cash settlement features. We expense stock option awards over the vesting period based on the estimated fair value of the options at the grant date using a binomial pricing model. The utilization of the binomial model requires us to make certain estimates related to the volatility of the share price of our common stock, risk-free interest rates, the amount of awards expected to be forfeited, and our expected dividend yield. To calculate the fair value of stock option awards granted from 2014 to 2016, we assumed (i) a volatility ranging between 28% and 32%, (ii) a risk-free rate ranging between 1.0% and 1.8%, (iii) a dividend yield of between 3% and 5%, and (iv) an expected life of 5.5 years.

Other Stock Plans

In addition to the share-based plans described above, we maintain an upper-middle management plan and an employee stock purchase plan. The awards are time-based equity-classified awards that vest within three years of the grant date and compensation expense is recognized over the life of the award based on the grant date fair value. Through the employee stock purchase plan, employees can purchase stock at a discount of 10% of the lower of the beginning and ending stock price each quarter. During 2016, 2015 and 2014, we granted 118,000 shares, 116,000 shares and 118,000 shares, respectively, under both of these programs and recorded expense of $1.6 million, $1.9 million and $2.2 million, respectively.