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, 2017, 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 shares of our common stock 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 2017, $18 million in 2016 and $14 million in 2015 and is included in "Selling and administrative expenses" in our consolidated statements of income. No net income tax effects were recognized for share-based arrangements in the consolidated statements of income in 2017, 2016 and 2015.

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

MARKET SHARE UNITS

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



	2017		2016		2015
Weighted average grant date fair values	$	35.79	$	19.59	$	30.06

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 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 the grant year. 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 shares of our 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:	2017		2016		2015
Expected volatility	32.10	%	34.02	%	42.70	%
Risk-free rate	1.39	%	0.86	%	1.09	%
Expected term (in years)	2.96		2.95		2.95
Expected dividends	—		—		—

Nonvested MSUs outstanding as of December 31, 2017 and MSU activity during 2017 were as follows:



	Number of MSUs (000)		Weighted Average Grant Date Fair Value
Nonvested at January 1, 2017	1,157		$	23.39
Granted	371		35.79
Vested	(417	)	30.06
Forfeited	(14	)	26.20
Nonvested at December 31, 2017	1,097		25.01

With respect to the MSUs granted in 2015, for which the three-year period ended December 31, 2017, 417,001 vested for approximately 554,624 shares of common stock based on the actual performance of our stock price.

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, 2017. 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:



	2017		2016		2015
Weighted average grant date fair values	$	39.42	$	21.10	$	30.63

The performance shares generally vest after a three-year period 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 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:	2017		2016		2015
Expected volatility	32.10	%	34.02	%	42.70	%
Risk-free rate	1.39	%	0.86	%	1.09	%
Expected term (in years)	2.96		2.95		2.95
Expected dividends	—		—		—

Nonvested performance shares outstanding as of December 31, 2017 and performance share activity during 2017 were as follows:



	Number of Performance Shares (000)		Weighted Average Grant Date Fair Value
Nonvested at January 1, 2017	246		$	24.98
Granted	113		39.42
Vested	(99	)	30.63
Forfeited	(4	)	26.75
Nonvested at December 31, 2017	256		29.14

With respect to the performance shares granted in 2015, for which the three-year performance period ended December 31, 2017, 99,238 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 $4 million as of December 31, 2017. We expect that cost to be recognized over a weighted average period of 1.8 years.

RESTRICTED STOCK UNITS

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



	2017		2016		2015
Weighted average grant date fair values	$	31.57	$	23.94	$	28.56

RSUs granted as special retention awards, including those granted in 2017, 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. The RSUs granted in 2017 were special retention awards that generally vest in three years from the date of grant.

RSUs outstanding as of December 31, 2017 and RSU activity during the year then ended were as follows:



	Number of RSUs (000)		Weighted Average Grant Date Fair Value
Nonvested at January 1, 2017	228		$	27.31
Granted	133		31.57
Vested	(54	)	31.38
Forfeited	(3	)	29.83
Nonvested at December 31, 2017	304		14.67

As of December 31, 2017, there was $5 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 2.2 years. The total fair value of RSUs that vested was $2 million during 2017, $2 million during 2016 and $4 million during 2015.

STOCK OPTIONS

We last granted stock options in 2012. All outstanding stock options are exercisable. 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, 2017 and of stock option activity during the 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, 2017	2,174		$	22.55	2.78	$	22
Exercised	(590	)	23.88
Canceled	(323	)	46.80
Outstanding at December 31, 2017	1,261		$	15.72	2.48	$	28
Exercisable at December 31, 2017	1,261		$	15.72	2.48	$	28
Vested at December 31, 2017	1,261		$	15.72	2.48	$	28



(millions)	2017		2016		2015
Intrinsic value of stock options exercised	$	7	$	4	$	6
Cash received from stock options exercised	$	14	$	4	$	6
Fair value of stock options vested	$	—	$	1	$	1

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. In August 2017, we amended this program to remove the election to receive cash or shares of USG common stock upon termination of board service and, as a result, all deferred stock units granted after August 2017 will be paid in shares of USG common stock. Also in August 2017, four of our non-employee directors elected to receive shares of stock for previously granted deferred stock units, and as a result, in 2017, we recorded a reclassification from a liability to equity of $6 million for these previously deferred awards.