NOTE 13—STOCK-BASED COMPENSATION

Equity instruments are measured at fair value on the grant date. Stock-based compensation expense is generally recognized on a straight-line basis over the requisite service periods of the awards. Compensation expense is based on awards we expect to ultimately vest. Therefore, we have reduced compensation expense for estimated forfeitures based on our historical forfeiture rates. Our estimate of forfeitures is determined at the grant date and is revised if our actual forfeiture rate is materially different from our estimate.

Total compensation expense recognized is as follows:

	2015		2014		2013
	(In thousands)
Stock options	$	770	$	1,747	$	4,321
Restricted stock and restricted stock units		14,395		14,417		12,326
Performance shares		1,428		352		4,453
Total	$	16,593	$	16,516	$	21,100

The components of the total gross unrecognized estimated compensation expense and their expected remaining weighted-average periods for expense recognition are as follows:

	Amount (In thousands)		Weighted-Average Period (years)
Stock options	$	259		0.2
Restricted stock and restricted stock units		22,290		1.7
Performance shares		1,974		1.1
	$	24,523

Stock Plans

2014 McDermott International, Inc. Long-Term Incentive Plan

In May 2014, our shareholders approved the 2014 McDermott International, Inc. Long-Term Incentive Plan (the “2014 LTIP”). Members of the Board of Directors, officers, employees and consultants are eligible to participate in the 2014 LTIP. The Compensation Committee of the Board of Directors selects the participants for the 2014 LTIP. The 2014 LTIP provides for a number of forms of stock-based compensation, including incentive and non-qualified stock options, restricted stock, restricted stock units and performance shares and performance share units, subject to satisfaction of specific performance goals. Shares approved under the 2009 McDermott International, Inc. Long-Term Incentive Plan (the “2009 LTIP”) that were not awarded as of the date of approval of the 2014 LTIP, or shares that are subject to awards that are cancelled, terminated, forfeited, expired or settled in cash in lieu of shares, are available for issuance under the 2014 LTIP. As part of the approval of the 2014 LTIP, 6,600,000 shares were authorized for issuance.

2009 McDermott International, Inc. Long-Term Incentive Plan

We no longer issue awards under the 2009 LTIP. Members of the Board of Directors, executive officers and key employees were eligible to participate in the 2009 LTIP. The Compensation Committee of the Board of Directors selected the participants for the 2009 LTIP. The 2009 LTIP provided for a number of forms of stock-based compensation, including incentive and non-qualified stock options, restricted stock, restricted stock units and performance shares and performance units, subject to satisfaction of specific performance goals. Shares approved under the 2001 Directors and Officers Long-Term Incentive Plan (the “2001 LTIP”) that were not awarded as of the date of approval of the 2009 LTIP, or shares that were subject to awards that were cancelled, terminated, forfeited, expired or settled in cash in lieu of shares, were available for issuance under the 2009 LTIP. As part of the approval of the 2009 LTIP, 9,000,000 shares were authorized for issuance. Options to purchase shares were granted at the fair market value (closing trading price) on the date of grant, became exercisable at such time or times as determined when granted and expired not more than seven years after the date of grant.

MDR’s equity award agreements under the 2014 LTIP and 2009 LTIP provide that amounts that the Company is required to withhold on behalf of participants for federal or state income taxes upon the vesting of restricted stock units, performance shares or performance units will be satisfied by withholding shares of MDR common stock having an aggregate fair market value equal to but not exceeding the amount of such required tax withholding. Transactions under the 2009 LTIP are accounted for as purchases of the shares by the Company, and are included in the ordinary shares roll-forward in Note 16, Stockholders’ Equity.

Further, the 2014 LTIP contains a provision that shares of MDR common stock tendered by a participant or withheld as full or partial payment of minimum withholding taxes related to the vesting or settlement of restricted stock, restricted stock units, performance shares or performance units shall become available again for awards under the 2014 LTIP. Transactions under the 2014 LTIP are accounted for as a purchase and subsequent cancellation of the shares by the Company, and are included in the ordinary shares roll-forward in Note 16, Stockholders’ Equity.

Stock Options

The fair value of each option grant was estimated with the following weighted-average assumptions:

	Year Ended December 31,
	2015	2014	2013
Risk-free interest rate	-	-		0.68	%
Expected volatility	-	-		56	%
Expected life of the option in years	-	-		4.60
Expected dividend yield	-	-		0.0	%

The risk-free interest rate is based on the implied yield on a U.S. Treasury zero-coupon issue with a remaining term equal to the expected life of the option. The expected volatility is based on implied volatility from publicly traded options on our common stock, historical volatility of the price of our common stock and other factors. The expected life of the option is based on observed historical patterns. The expected dividend yield is zero based on the projected annual dividend payment. This amount is zero because we have not paid cash dividends historically and do not expect to pay cash dividends for the foreseeable future, although management continues to review and may elect to change this practice.

The following table summarizes activity for our stock options for 2015 (share data in thousands):

	Number of Option Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value (in millions)
Outstanding at beginning of period		3,293		$	12.18
Granted		-			-
Exercised		(197	)		3.47
Cancelled/expired/forfeited		(200	)		12.34
Outstanding at end of period⁽¹⁾		2,896		$	12.76	2.4 years	-
Exercisable at end of period		2,681		$	12.95	2.3 years	-

(1)	Of the remaining outstanding options at the end of the period, we expect approximately 0.2 million shares underlying the options to vest at a weighted-average exercise price of $10.33.

The intrinsic value is calculated as the total number of option shares multiplied by the excess of the closing price of our common stock on the last trading day over the exercise price of the options. This amount changes based on the fair market value of our common stock. Had all option holders exercised their options on December 31, 2015, the aggregate intrinsic value of the options would have been negative, as their exercise price is higher than closing price of our common stock on December 31, 2015.

The total intrinsic value of stock options exercised during 2015, 2014 and 2013 was $0.3 million, $0.9 million and $0.5 million, respectively. During 2015, cash from the exercise of these stock options was $0.7 million and no tax benefits were realized from exercise of these stock options. The weighted-average fair value of the stock options granted in 2013 was $4.78 million. The total fair value of shares vested during 2015, 2014 and 2013 was $2.6 million, $4.4 million and $3.7 million, respectively.

Restricted Stock and Restricted Stock Units

Nonvested restricted stock and restricted stock units and changes during 2015 were as follows (share data in thousands):

	Number of Shares			Weighted-Average Grant Date Fair Value
Nonvested at beginning of period		4,648		$	8.00
Granted		4,351			3.47
Vested		(1,688	)		8.45
Cancelled/forfeited		(622	)		5.82
Nonvested at end of period		6,689		$	5.15

There were no tax benefits realized related to restricted stock and restricted stock units that lapsed or vested during 2015, 2014 and 2013.

Performance Shares

Nonvested performance share awards and changes during the year ended December 31, 2015 were as follows (share data in thousands):

	Number of Shares			Weighted-Average Grant Date Fair Value
Nonvested at beginning of period		1,452		$	11.55
Granted		1,775			3.37
Cancelled/forfeited		(637	)		8.44
Nonvested at end of period		2,590		$	6.71

In March 2015 we issued performance unit awards totaling 1,774,770 shares which were classified as liability awards. Compensation cost for liability awards is re-measured at each reporting period and is recognized as expense over the applicable service period. The remaining weighted-average vesting period of the performance units is 2.2 years.