NOTE 11 STOCK COMPENSATION

General

Prior to the Spin-off, our employees participated in Occidental’s stock-based incentive plans under which, if they were eligible, they received Occidental stock awards. Effective on the Spin-off date of November 30, 2014, our employees and non-employee directors began participating in our long-term incentive plan.

Our incentive plan authorizes the Compensation Committee of our Board of Directors to grant up to a total of 25 million shares in the form of stock options, stock appreciation rights, stock awards, performance awards and cash awards, among others, to our employees, non-employee directors and other plan participants.

In connection with the Spin-off, unvested share-based compensation awards granted to our employees under Occidental’s stock-based incentive plans and held by grantees as of November 30, 2014 were replaced with substitute awards based on CRC common shares. These substitute awards were intended to generally preserve the value of the original Occidental award determined as of November 30, 2014. Original and remaining vesting periods of Occidental awards were unaffected by the substitution. There were approximately 650 employees affected by the substitution of awards. The substitution of awards did not cause us to recognize incremental compensation expense. These substitute awards reduced the maximum number of shares of our common stock available for delivery under our incentive plan.

We expense all share-based payments to employees and non-employee directors based on the grant date fair value of the awards over the requisite service period, adjusted for estimated forfeitures.

During 2014, non-employee directors were granted awards for approximately 74,600 shares of restricted stock, which fully vest one year from the date of grant. Compensation expense for these awards that will be recognized during the vesting period was measured using the quoted market price of our common stock on the grant date.

Compensation expense for stock-based awards for the month ended December 31, 2014 was approximately $1 million. Prior to the Spin-off, Occidental allocated certain costs to us which included compensation costs for stock-based awards of Occidental stock. If we were to estimate the equity compensation component of all costs allocated to us by Occidental using the same allocation method used by Occidental, stock compensation expense allocated to us was approximately $26 million, $33 million and $20 million for January 1, 2014 through November 30, 2014, total year 2013, and total year 2012, respectively. Since these costs were allocated to us, it is not practical to calculate the tax benefit for those years.

As of December 31, 2014, unrecognized compensation expense for all our unvested stock-based incentive awards, based on the year end value of our common stock, was $74 million. This expense is expected to be recognized over a weighted-average period of 2.3 years.

Restricted Stock Units

Certain employees are awarded restricted stock units (RSUs), some of which have performance criteria, and are in the form of, or equivalent in value to, actual shares of CRC common stock. Depending on their terms, restricted stock units are settled in cash or stock at the time of vesting. These awards vest ratably over three years, or at the end of two or three years, following the date of grant, or upon satisfaction of any performance criteria, if later. For a substantial majority of the restricted stock units, dividend equivalents are paid during the vesting period.

There were no CRC restricted stock units granted for the years ended December 31, 2013 or 2012. The following summarizes our restricted stock unit activity for the year ended December 31, 2014:

	Cash-Settled				Stock-Settled
	RSUs (000’s)		Weighted-Average Grant Date Fair Value		RSUs (000’s)	Weighted-Average Grant-Date Fair Value
Unvested at December 31, 2013	—		$	—	—	$	—
Granted	4,562		$	7.37	6,663	$	7.84
Vested	—		$	—	—	$	—
Forfeited	(14	)	$	7.37	—	$	—
Unvested at December 31, 2014	4,548		$	7.37	6,663	$	7.84

Of the total awards granted, approximately 4,562,000 cash-settled units and 5,950,000 stock-settled units were substitute awards. The remainder were new awards granted following the Spin-off.

Stock Options

Following the Spin-off, we granted stock options to certain employees under our long-term incentive plan. The options permit purchase of our common stock at exercise prices no less than the fair market value of the stock on the date the options were granted. The options have terms of seven years and vest ratably, with one-third vesting and becoming exercisable on each anniversary date following the date of grant.

The fair value of each option is measured on the grant date using the Black-Scholes option valuation model and expensed on a straight-line basis over the vesting period. The expected life of stock options is calculated based on the simplified method and represents the period of time that options granted are expected to be held prior to exercise. In the absence of adequate stock price history of CRC common stock, the volatility factor is based on the average volatilities of the stocks of a select group of peer companies, which are similar in nature to us. The risk-free interest rate is the implied yield available on zero coupon (US Treasury Strip) T-notes at the grant date with a remaining term approximating the expected life. The dividend yield is the expected annual dividend yield over the expected life, expressed as a percentage of the stock price on the grant date. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by employees who receive stock-based incentive awards, and subsequent events may not be indicative of the reasonableness of the original estimates of fair value made by us.

The following table summarizes our option activity during the year ended December 31, 2014:

	Options (000’s)	Weighted- Average Exercise Price		Weighted- Average Grant- Date Fair Value		Aggregate Intrinsic Value
Beginning balance, December 31, 2013	—	$	—	$	—	$	—
Granted	8,481	8.11		1.98		—
Exercised	—	—		—		—
Forfeited	—	—		—		—
Expired or Canceled	—	—		—		—
Ending balance, December 31, 2014	8,481	$	8.11	$	1.98	$	—

There were no CRC options granted for the years ended December 31, 2013 and 2012. There were no vested or exercisable options at December 31, 2014.

The grant date assumptions used in the Black-Scholes valuation for CRC options granted during 2014 were as follows:

	2014
Exercise price per share	$	8.11
Expected life (in years)	4.5
Expected volatility	35.4		%
Risk-free interest rate	1.4		%
Dividend yield	0.5		%
Grant date fair value of stock option awards granted	$	1.98

Employee Stock Purchase Plan

Effective January 1, 2015, we have adopted the California Resources Corporation 2014 Employee Stock Purchase Plan (the “ESPP”). The ESPP will provide our employees the ability to purchase shares of our common stock at a price equal to 85% of the closing price of a share of our common stock as of the first or last day of each offering period (a fiscal quarter), whichever amount is less.

The maximum number of shares of our common stock which may be issued pursuant to the ESPP is subject to certain annual limits and has a cumulative limit of 5 million shares, subject to adjustment pursuant to the terms of the ESPP. As of January 1, 2015, about 45% of our employees have elected to participate in the plan.