Share-Based Compensation

We grant share-based compensation to eligible participants under our amended Long-Term Incentive Plan, or LTIP. The LTIP was approved by our Board of Directors and stockholders. As of December 31, 2013, a total of 12.7 million shares of common stock were authorized for grants under the LTIP, of which 3.2 million shares were reserved for future grants. The LTIP authorizes the Board, or the Board’s Compensation and Organization Committee, to provide equity-based compensation in the form of stock options, stock appreciation rights, or SARs, restricted stock, restricted stock units, or RSUs, market share units, or MSUs, performance shares and units, and other cash and share-based awards for the purpose of providing our directors, officers and other employees incentives and rewards for performance. We may issue common shares upon option exercises and upon the vesting or grant of other awards under the LTIP from our authorized but unissued shares or from treasury shares.

Our expense for share-based arrangements was $19 million in 2013, $17 million in 2012 and $21 million in 2011 and is included in selling and administrative expense in our consolidated statements of operations. No income tax benefits were recognized for share-based arrangements in the consolidated statements of operations in 2013, 2012 and 2011. We recognize expense on all share-based awards over the service period, which is the shorter of the period until the employees’ retirement eligibility dates or the service period of the award for awards expected to vest. Accordingly, expense is generally reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

STOCK OPTIONS

We granted stock options in 2012 and 2011 with exercise prices set at the closing price of USG common stock on the date of grant. The stock options generally become exercisable in four equal annual installments beginning one year from the date of grant, although they may become exercisable earlier in the event of death, disability, retirement or a change in control. The stock options generally expire ten years from the date of grant, or earlier in the event of death, disability or retirement.

We estimated the fair value of each stock option granted on the date of grant using a Black-Scholes option valuation model that uses the assumptions noted in the following table. We based expected volatility on a 50% weighting of our historical volatilities and 50% weighting of implied USG volatilities. The risk-free rate was based on zero-coupon U.S. government issues at the time of grant. The expected term was developed using the simplified method, as permitted by the Securities and Exchange Commission because there is not sufficient historical stock option exercise experience available.



Assumptions:	2012		2011
Expected volatility	59.03	%	55.88	%
Risk-free rate	1.24	%	2.85	%
Expected term (in years)	6.26		6.25
Expected dividends	—		—

A summary of stock options outstanding as of December 31, 2013 and of stock option activity during the fiscal year then ended is presented below:



	Number of Options (000)		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (years)	Aggregate Intrinsic Value (millions)
Outstanding at January 1, 2013	5,063		$	25.02	6.18	$	45
Exercised	(377	)	10.34
Canceled	(197	)	41.28
Forfeited	—		—
Outstanding at December 31, 2013	4,489		$	25.54	5.21	$	39
Exercisable at December 31, 2013	3,602		$	27.98	5.51	$	28
Vested or expected to vest at December 31, 2013	4,482		$	25.55	5.20	$	39

The weighted average grant date fair value was $8.39 for options granted during 2012 and $10.60 for options granted during 2011.

Intrinsic value for stock options is defined as the difference between the current market value of our common stock and the exercise price of the stock options. The total intrinsic value of stock options exercised was $7 million in 2013, $7 million in 2012 and less than $1 million in 2011 and cash received from the exercise of stock options was $4 million in 2013, $4 million in 2012 and less than $1 million in 2011. As a result of the NOL we reported for federal tax purposes for 2013, 2012 and 2011, none of the excess tax benefit with respect to these exercises has been reflected in additional paid-in capital as of December 31, 2013. Included in our federal tax NOL carryforwards is $47 million for which a tax benefit of $17 million will be recorded in additional paid-in capital if the loss carryforward is utilized.

As of December 31, 2013, there was $2 million of total unrecognized compensation cost related to nonvested share-based compensation awards represented by stock options granted under the LTIP. We expect that cost to be recognized over a weighted average period of 1.9 years. The total fair value of stock options vested was $10 million during 2013, $5 million during 2012 and $14 million during 2011.

MARKET SHARE UNITS

We granted market share units, or MSUs, during 2013. Generally, half of the MSUs vest after a two-year period and the other half after a three-year period, in each case, based on our actual stock price performance during such periods. The number of MSUs earned will vary from 0% to 150% of the number of MSUs awarded depending on the actual performance of our stock price. In the case of termination of employment due to death, disability or retirement during the performance period, vesting will be pro-rated based on the number of full months employed in 2013. Awards earned will be issued at the end of the two-year and three-year periods. MSUs may vest earlier in the case of a change in control. Each MSU earned will be settled in common stock.

We estimated the fair value of each MSU granted on the date of grant using a Monte Carlo simulation that used the assumptions noted in the following table. Volatility was based on stock price history immediately prior to grant for a period commensurate with the expected term. The risk-free rate was based on zero-coupon U.S. government issues at the time of grant. The expected term represents the period from the valuation date to the end of the performance period.



Assumptions:	2013
Expected volatility	60.97	%
Risk-free rate	0.35	%
Expected term (in years)	2.38
Expected dividends	—

Nonvested MSUs outstanding as of December 31, 2013 and MSU activity during 2013 were as follows:



	Weighted Number of Shares (000)		Weighted Average Grant Date Fair Value
Nonvested at January 1, 2013	—		$	—
Granted	361		34.55
Vested	—		—
Forfeited	(2	)	34.55
Nonvested at December 31, 2013	359		34.55

Total unrecognized compensation cost related to nonvested share-based compensation awards represented by MSUs granted under the LTIP was $2 million as of December 31, 2013. We expect that cost to be recognized over a weighted average period of 1.6 years.

RESTRICTED STOCK UNITS

We granted RSUs during 2013, 2012 and 2011. RSUs granted prior to 2013 generally vest in four equal annual installments beginning four years from the date of grant. RSUs granted as special retention awards, including those granted in 2013, generally vest after a specified number of years from the date of grant or at a specified date and RSUs granted with performance goals vest if those goals are attained. RSUs may vest earlier in the case of death, disability, retirement or a change in control. Each RSU is settled in a share of our common stock after the vesting period. The fair value of each RSU granted is equal to the closing market price of our common stock on the date of grant.

In 2013, we granted RSUs as special retention awards with respect to 39,500 shares of common stock that vest in four years from the date of grant.

RSUs outstanding as of December 31, 2013 and RSU activity during 2013 were as follows:



	Number of Shares (000)		Weighted Average Grant Date Fair Value
Nonvested at January 1, 2013	1,249		$	14.74
Granted	40		29.44
Vested	(487	)	13.54
Forfeited	(2	)	30.31
Nonvested at December 31, 2013	800		16.15

As of December 31, 2013, there was $4 million of total unrecognized compensation cost related to nonvested share-based compensation awards represented by RSUs granted under the LTIP. We expect that cost to be recognized over a weighted average period of 2.0 years. The total fair value of RSUs that vested was $7 million during 2013, $13 million during 2012 and $5 million during 2011.

PERFORMANCE SHARES

We granted performance shares during 2013, 2012 and 2011. The performance shares generally vest after a period of three years based on our total stockholder return relative to the performance of the Dow Jones U.S. Construction and Materials Index, with adjustments to that index in certain circumstances, for the three-year period. The number of performance shares earned will vary from 0% to 200% of the number of performance shares awarded depending on that relative performance. Vesting will be pro-rated based on the number of full months employed during the performance period in the case of death, disability, retirement or a change in control, and pro-rated awards earned will be paid at the end of the three-year period. Each performance share earned will be settled in common stock.

We estimated the fair value of each performance share granted on the date of grant using a Monte Carlo simulation that uses the assumptions noted in the following table. Expected volatility is based on implied volatility of our traded options and the daily historical volatilities of our peer group. The risk-free rate was based on zero coupon U.S. government issues at the time of grant. The expected term represents the period from the grant date to the end of the three-year performance period.



Assumptions:	2013		2012		2011
Expected volatility	59.98	%	67.63	%	77.84	%
Risk-free rate	0.43	%	0.36	%	1.20	%
Expected term (in years)	2.88		2.89		2.89
Expected dividends	—		—		—

Nonvested performance shares outstanding as of December 31, 2013 and performance share activity during 2013 were as follows:



	Weighted Number of Shares (000)		Weighted Average Grant Date Fair Value
Nonvested at January 1, 2013	360		$	25.29
Granted	105		38.89
Vested	(152	)	28.40
Forfeited	(5	)	26.10
Nonvested at December 31, 2013	308		28.36

With respect to the 227,539 performance shares granted in 2011, for which the three-year performance period ended December 31, 2013, 152,295 performance shares vested for approximately 202,857 common shares based on the level of total stockholder return attained relative to the performance of the Dow Jones U.S. Construction and Materials Index, as adjusted. The remaining performance shares granted in 2011 were previously forfeited.

Total unrecognized compensation cost related to nonvested share-based compensation awards represented by performance shares granted under the LTIP was $4 million as of December 31, 2013. We expect that cost to be recognized over a weighted average period of 1.7 years.

NON-EMPLOYEE DIRECTOR DEFERRED STOCK UNITS

Our non-employee directors may elect to receive a portion of their compensation as deferred stock units that increase or decrease in value in direct relation to the market price of our common stock. Deferred stock units earned through December 31, 2007 will be paid in cash upon termination of board service. Deferred stock units earned thereafter will be paid in cash or shares of USG common stock, at the election of the director, upon termination of board service.

The number of deferred stock units held by non-employee directors was approximately 182,632 as of December 31, 2013, 172,124 as of December 31, 2012 and 163,627 as of December 31, 2011. We recorded expense related to these deferred stock units of $1 million in 2013, $3 million in 2012 and zero in 2011.