Share-Based Compensation

We grant share-based compensation to eligible participants under our 2016 Long-Term Incentive Plan, or New LTIP, which was approved by our Board of Directors and stockholders in 2016, and prior thereto under our Long-Term Incentive Plan, which, together with the New LTIP, is referred to as the LTIP. As of December 31, 2016, a total of 7 million shares of common stock were reserved for future grants under the New LTIP. The New LTIP authorizes 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 incentive and share-based awards for the purpose of providing our employees, officers and non-employee directors 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 in continuing operations for share-based arrangements was $18 million in 2016, $14 million in 2015 and $20 million in 2014 and is included in selling and administrative expense in our consolidated statements of income. No income tax benefits were recognized for share-based arrangements in the consolidated statements of income in 2016, 2015 and 2014.

Excess tax benefits related to share based compensation are the difference between the amount of deductible compensation expense reported for tax purposes and the compensation expense recorded for financial reporting purposes for a stock award. Excess tax benefits that are not realized are not reflected in additional paid-in-capital until there is a reduction to taxes payable. As a result of the NOL carryforwards for federal tax purposes in 2016, 2015 and 2014, none of the excess tax benefits with respect to exercised stock options and vestings of RSUs, MSUs and performance shares for those years has been reflected in additional paid-in-capital as of December 31, 2016. Included in our federal tax NOL carryforwards is $70 million of unrealized excess tax benefits for which a tax benefit of $26 million will be recorded in additional paid-in-capital if the loss carryforward is fully utilized.

Certain employees of L&W previously received grants of MSUs, performance shares and RSUs. The expense associated with these awards was $1 million for 2016, 2015, and 2014 and is included in "Income from discontinued operations" in our consolidated statements of income. On October 31, 2016, any unvested awards were forfeited upon the sale of L&W to ABC Supply and are included as forfeited in the respective tables below.

MARKET SHARE UNITS

We granted MSUs with the following weighted average grant date fair values:



	2016		2015		2014
Weighted average grant date fair values	$	19.59	$	30.06	$	40.20

MSUs generally vest after a three-year period based on our actual stock price performance during such period. The number of MSUs earned will vary from zero 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 2016. Awards earned will be issued at the end of the three-year period. MSUs may vest earlier in the case of a change in control in most circumstances only if there is also a related loss of employment or diminution of duties. 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:	2016		2015		2014
Expected volatility	34.02	%	42.70	%	54.93	%
Risk-free rate	0.86	%	1.09	%	0.63	%
Expected term (in years)	2.95		2.95		2.94
Expected dividends	—		—		—

Nonvested MSUs outstanding as of December 31, 2016 and MSU activity during 2016 were as follows:



	Weighted Number of Shares (000)		Weighted Average Grant Date Fair Value
Nonvested at January 1, 2016	743		$	34.33
Granted	801		19.59
Vested	(304	)	40.20
Forfeited	(83	)	23.22
Nonvested at December 31, 2016	1,157		23.39

With respect to the MSUs granted in 2014, for which the three-year period ended December 31, 2016, 303,790 vested for approximately 267,335 common shares based on the actual performance of our stock price. The remaining MSUs granted in 2014 were forfeited.

Total unrecognized compensation cost related to nonvested share-based compensation awards represented by MSUs granted under the LTIP was $5 million as of December 31, 2016. We expect that cost to be recognized over a weighted average period of 1.7 years.

PERFORMANCE SHARES

We granted performance shares with the following weighted average grant date fair values:



	2016		2015		2014
Weighted average grant date fair values	$	21.10	$	30.63	$	46.46

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 zero 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 settled in common stock at the end of the three-year period.

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. 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 grant date to the end of the three-year performance period.



Assumptions:	2016		2015		2014
Expected volatility	34.02	%	42.70	%	54.93	%
Risk-free rate	0.86	%	1.09	%	0.63	%
Expected term (in years)	2.95		2.95		2.94
Expected dividends	—		—		—

Nonvested performance shares outstanding as of December 31, 2016 and performance share activity during 2016 were as follows:



	Weighted Number of Shares (000)		Weighted Average Grant Date Fair Value
Nonvested at January 1, 2016	222		$	37.20
Granted	214		21.10
Vested	(86	)	46.46
Forfeited	(104	)	25.22
Nonvested at December 31, 2016	246		24.98

With respect to the performance shares granted in 2014, for which the three-year performance period ended December 31, 2016, 86,478 of the performance awards vested for no common shares.

Total unrecognized compensation cost related to nonvested share-based compensation awards represented by performance shares granted under the LTIP was $2 million as of December 31, 2016. We expect that cost to be recognized over a weighted average period of 1.7 years.

RESTRICTED STOCK UNITS

We granted RSUs during 2016, 2015 and 2014 with the following weighted average grant date fair values:



	2016		2015		2014
Weighted average grant date fair values	$	23.94	$	28.56	$	32.50

RSUs granted as special retention awards, including those granted in 2016, 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 2016, we granted RSUs as special retention awards with respect to 106,000 shares of common stock that generally vest in three years from the date of grant.

RSUs outstanding as of December 31, 2016 and RSU activity during 2016 were as follows:



	Number of Shares (000)		Weighted Average Grant Date Fair Value
Nonvested at January 1, 2016	270		$	24.49
Granted	106		23.94
Vested	(128	)	18.70
Forfeited	(20	)	26.45
Nonvested at December 31, 2016	228		27.31

As of December 31, 2016, there was $3 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 2.6 years. The total fair value of RSUs that vested was $2 million during 2016, $4 million during 2015 and $6 million during 2014.

STOCK OPTIONS

We last granted stock options in 2012. 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.

A summary of stock options outstanding as of December 31, 2016 and of stock option activity during 2016 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, 2016	3,496		$	28.00	2.99	$	19
Exercised	(305	)	13.71
Canceled	(1,017	)	43.93
Outstanding at December 31, 2016	2,174		$	22.55	2.78	$	22
Exercisable at December 31, 2016	2,174		$	22.55	2.78	$	22
Vested or expected to vest at December 31, 2016	2,174		$	22.55	2.78	$	22



(millions)	2016		2015		2014
Intrinsic value of stock options exercised	$	4	$	6	$	8
Cash received from stock options exercised	$	4	$	6	$	4
Fair value of stock options vested	$	1	$	1	$	2

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.

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 as of December 31 was as follows:



	2016	2015	2014
Deferred stock units held by non-employee directors	220,047	193,117	164,235

We recorded expense related to these deferred stock units of $1 million in 2016, 2015 and 2014, respectively.