SHARE-BASED EMPLOYEE COMPENSATION

We issue to our employees restricted stock units (“RSUs”), which consist of time-based and performance-based awards. RSUs provide the recipients with the right to shares of Common Stock following a specified performance period and/or vesting period. Time-based awards generally have a vesting feature whereby one-third of each grant of RSUs vests after the first anniversary of the grant date, one-third after the second anniversary, and one-third after the third anniversary. Performance-based RSUs vest at the end of the specified performance period, generally three years, assuming required metrics are met. Performance-based RSUs have two components: one based on Ford’s internal financial performance metrics, and the other based on Ford’s total shareholder return relative to total shareholder returns of an industrial and automotive peer group. We issue new shares of Common Stock upon vesting of RSUs. At the time of vest, RSU awards are net settled (shares are withheld to cover the employee tax obligation).

The fair value of both the time-based and the portion of the performance-based RSUs pertaining to internal performance metrics is determined using the closing price of our Common Stock. The fair value of time-based RSUs is expensed over the shorter of the vesting period, using the graded vesting method, or the time period an employee becomes eligible to retain the award at retirement. The fair value of performance-based RSUs is expensed when it is probable and estimable as measured against the performance metrics over the shorter of the performance or required service periods. Expense is recorded in Selling, administrative, and other expenses.

Share-based compensation awards outstanding at December 31, 2016 consist of awards granted to employees under two Long-Term Incentive Plans (“LTIP”): the 1998 LTIP and the 2008 LTIP. No further grants may be made under the 1998 LTIP. Under the 2008 LTIP, the number of shares that may be granted in any year is limited to 2% of our issued and outstanding Common Stock as of December 31 of the prior calendar year. Any unused portion is available for awards in later years. The limit may be increased up to 3% in any year, with a corresponding reduction in shares available for grants in future years. At December 31, 2016, the number of unused shares carried forward was 423 million shares.

NOTE 20. SHARE-BASED EMPLOYEE COMPENSATION (Continued)

The performance-based RSUs granted in March 2015 and 2016 include a relative Total Shareholder Return (“TSR”) metric. We estimate the fair value of the TSR component of the performance-based RSUs using a Monte Carlo simulation. Inputs and assumptions used to calculate the fair value at grant date were as follows:



	2015			2016
Fair value per stock award	$	16.98		$	15.56
Grant date stock price	16.03			13.54
Assumptions:
Ford’s stock price expected volatility (a)	23.3		%	23.1		%
Expected average volatility of peer companies (a)	24.1		%	26.4		%
Risk-free interest rate	1.09		%	0.98		%
Dividend yield	3.74		%	4.43		%

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(a)	Expected volatility based on three years of daily closing share price changes ending on the grant date.

During 2016, activity for RSUs was as follows (in millions, except for weighted average fair value):



	Shares		Weighted- Average Fair Value
Outstanding, beginning of year	27.4		$	15.04
Granted	17.5		13.54
Vested	(11.1	)	14.07
Forfeited	(0.4	)	14.13
Outstanding, end of year	33.4		14.49
RSUs expected to vest	32.9		N/A

The table above also includes shares awarded to non-employee directors. At December 31, 2016, there were 362,271 shares vested, but unissued.

Additional information about RSUs for the years ended December 31 was as follows (in millions, except for weighted average fair value):



	2014		2015		2016
Fair value of vested shares	$	102	$	126	$	157
Weighted average grant fair value (per unit)	15.40		15.86		13.54
Compensation cost (a)	95		125		135

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(a)	Net of tax benefit of $49 million, $65 million, and $72 million in 2014, 2015, and 2016, respectively.

As of December 31, 2016, there was approximately $90 million in unrecognized compensation cost related to non-vested RSUs. This expense will be recognized over a weighted average period of 1.8 years.

Stock Options

During 2016, no stock options were issued to our employees. As of December 31, 2016, the last of our outstanding stock options will expire in July 2024, if not exercised sooner. We measure the fair value of our stock options using the Black-Scholes option-pricing model and record expense in Selling, administrative, and other expenses.

For the years ended December 31, 2015 and 2016, stock options outstanding were 45.4 million and 35.5 million, respectively, and stock options exercisable were 39.3 million and 33.4 million, respectively. For the year ended December 31, 2016, the intrinsic value for vested and unvested stock options was $75 million and $0, respectively. The average remaining terms for fully vested stock options and unvested stock options were 4.2 years and 7.2 years, respectively. We received approximately $58 million in proceeds from the exercise of stock options in 2016. An equivalent of approximately $119 million in new issues was used to settle exercised stock options. Compensation cost for stock options for the year ended December 31, 2016 was $2.1 million, net of tax benefit of $0.5 million. As of December 31, 2016, there was approximately $0.4 million in unrecognized compensation cost related to non-vested stock options.