NOTE N – STOCK INCENTIVE PLANS

Ashland has stock incentive plans under which key employees or directors are granted stock appreciation rights (SARs), performance awards or nonvested stock awards. Each program is typically a long-term incentive plan designed to link employee compensation with increased shareholder value or reward superior performance and encourage continued employment with Ashland. Ashland recognizes compensation expense for the grant date fair value of stock-based awards over the applicable vesting period.

The components of Ashland’s pretax stock-based compensation expense included in continuing operations are as follows:

	Three months ended				Six months ended
	March 31				March 31
(In millions)	2018 (a)		2017 (b)		2018 (a)		2017 (b)
SARs	$	2	$	2	$	3	$	3
Nonvested stock awards		5		3		11		7
Performance share awards		2		2		6		4
	$	9	$	7	$	20	$	14

(a)

Included $2 million and $4 million of expense related to cash-settled nonvested restricted stock awards and $1 million and $3 million of expense related to cash-settled performance units during the three and six months ended March 31, 2018, respectively.

(b)

Included $2 million and $3 million of expense related to cash-settled nonvested restricted stock awards and $1 million and $2 million of expense related to cash-settled performance units during the three and six months ended March 31, 2017, respectively.

SARs

SARs are granted to employees or directors at a price equal to the fair market value of the stock on the date of grant and typically become exercisable over periods of one to three years. Unexercised SARs lapse ten years and one month after the date of grant. No SARs granted for the three months ended March 31, 2018 and 2017. SARs granted for the six months ended March 31, 2018 and 2017 were 470 thousand and 422 thousand, respectively. As of March 31, 2018, there was $11 million of total unrecognized compensation costs related to SARs. That cost is expected to be recognized over a weighted-average period of 2.2 years. Ashland estimates the fair value of SARs granted using the Black-Scholes option-pricing model. This model requires several assumptions, which Ashland has developed and updates based on historical trends and current market observations. The accuracy of these assumptions is critical to the estimate of fair value for these equity instruments.

Nonvested stock awards

Nonvested stock awards are granted to employees or directors at a price equal to the fair market value of the stock on the date of grant and generally vest over a one-to-five-year period. However, such shares or units are subject to forfeiture upon termination of service before the vesting period ends. Only nonvested stock awards granted in the form of shares entitle employees or directors to vote the shares. Dividends on nonvested stock awards granted are in the form of additional units or shares of nonvested stock awards, which are subject to vesting and forfeiture provisions.

Stock-settled nonvested stock awards

Nonvested stock awards granted in the form of shares were 2 thousand and 3 thousand for the three months ended March 31, 2018 and 2017, respectively, and 144 thousand and 84 thousand for the six months ended March 31, 2018 and 2017, respectively. As of March 31, 2018, there was $10 million of total unrecognized compensation costs related to these nonvested stock awards. That cost is expected to be recognized over a weighted-average period of 2.0 years.

Cash-settled nonvested stock awards

Certain nonvested stock awards are granted to employees and are settled in cash upon vesting. As of March 31, 2018, 229 thousand cash-settled nonvested stock awards were outstanding. The value of these cash-settled nonvested stock awards changes in connection with changes in the fair market value of the Ashland Common Stock. These awards generally vest over a period of three years. The expense recognized related to cash-settled nonvested stock awards was $2 million during both the three months ended March 31, 2018 and 2017, and $4 million and $3 million during the six months ended March 31, 2018 and 2017, respectively.

Executive performance incentive and retention program

During 2016, certain executives were granted performance-based restricted shares of Ashland in order to provide an incentive to remain employed in the period after the full separation. At March 31, 2018, there were 61 thousand shares outstanding in connection with these awards, which includes forfeitures and the cumulative value of forfeitable dividends. The expense recognition for these awards commenced upon completing the full separation of Valvoline which occurred on May 12, 2017, as discussed further in Note B, and resulted in $1 million and $3 million of expense for the three and six months ended March 31, 2018, respectively. As of March 31, 2018, there was $6 million of total unrecognized compensation costs related to these awards.

Performance awards

Ashland sponsors a long-term incentive plan that awards performance shares/units to certain key employees that are primarily tied to Ashland’s overall financial performance relative to internal targets. Additionally, certain outstanding performance awards are tied to Ashland's overall financial performance relative to the financial performance of selected industry peer groups. Awards are granted annually, with each award covering a three-year vesting period.

For awards granted in fiscal 2016, each performance share/unit is convertible to one share of Ashland Common Stock. These plans are recorded as a component of stockholders’ equity in the Condensed Consolidated Balance Sheets. Performance measures used to determine the actual number of performance shares issuable upon vesting include an equal weighting of Ashland’s total shareholder return (TSR) performance and Ashland’s return on investment (ROI) performance as compared to the internal targets. TSR relative to peers is considered a market condition while ROI is considered a performance condition under applicable U.S. GAAP.

For awards granted in fiscal 2017 and 2018, the performance measure used to determine the actual number of performance shares/units issuable upon vesting is the financial performance of Ashland compared to award targets. The financial performance award metric is considered a performance condition under applicable U.S. GAAP. Additionally, the actual number of performance shares/units issuable upon vesting can be potentially increased or decreased based on a TSR performance modifier relative to peers of Ashland. For awards granted in fiscal 2017, each performance unit will be settled in cash based on the fair value of Ashland common stock. For awards granted in fiscal 2018, each performance share/unit is convertible to one share of Ashland Common Stock.

Nonvested performance shares/units do not entitle employees to vote the shares or to receive any dividends thereon. No performance shares/units were granted for the three months ended March 31, 2018 and 2017. Performance shares/units granted for the six months ended March 31, 2018 and 2017 were 101 thousand and 56 thousand, respectively. As of March 31, 2018, there was $15 million of total unrecognized compensation costs related to performance shares/units. That cost is expected to be recognized over a weighted-average period of 2.0 years.