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 prior Long-Term Incentive Plan, which, together with the New LTIP, is referred to as the LTIP. As of December 31, 2018, a total of 6 million shares of common stock were reserved for future grants under the New LTIP. 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 $21 million in 2018, $18 million in 2017 and $18 million in 2016 and is included in "Selling and administrative expenses" in our consolidated statements of income. In 2018 we recognized a $7 million net income tax benefit for share-based arrangements in the consolidated statement of income; no income tax effects were recognized in 2017 or 2016.

MARKET SHARE UNITS

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



	2018		2017		2016
Weighted average grant date fair values	$	34.22	$	35.79	$	19.59

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. 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:	2018		2017		2016
Expected volatility	32.62	%	32.10	%	34.02	%
Risk-free rate	2.37	%	1.39	%	0.86	%
Expected term (in years)	2.95		2.96		2.95
Expected dividends	—		—		—

Nonvested MSUs outstanding as of December 31, 2018 and MSU activity during 2018 were as follows:



	Number of MSUs (000)		Weighted Average Grant Date Fair Value
Nonvested at January 1, 2018	1,097		$	25.01
Granted	429		34.22
Vested	(730	)	19.59
Forfeited	(8	)	35.79
Nonvested at December 31, 2018	788		$	34.93

With respect to the MSUs granted in 2016, for which the three-year period ended December 31, 2018, 730,145 vested for approximately 1,095,218 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, 2018. 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:



	2018		2017		2016
Weighted average grant date fair values	$	34.21	$	39.42	$	21.10

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 or retirement, 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:	2018		2017		2016
Expected volatility	32.61	%	32.10	%	34.02	%
Risk-free rate	2.37	%	1.39	%	0.86	%
Expected term (in years)	2.95		2.96		2.95
Expected dividends	—		—		—

Nonvested performance shares outstanding as of December 31, 2018 and performance share activity during 2018 were as follows:



	Number of Performance Shares (000)		Weighted Average Grant Date Fair Value
Nonvested at January 1, 2018	256		$	29.14
Granted	104		34.21
Vested	(143	)	21.10
Forfeited	(2	)	33.35
Nonvested at December 31, 2018	215		$	36.93

With respect to the performance shares granted in 2016, for which the three-year performance period ended December 31, 2018, 143,033 of the performance awards vested for 286,066 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, 2018. We expect that cost to be recognized over a weighted average period of 1.6 years.

RESTRICTED STOCK UNITS

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



	2018		2017		2016
Weighted average grant date fair values	$	36.92	$	31.57	$	23.94

RSUs granted as special retention awards 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.

RSUs outstanding as of December 31, 2018 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, 2018	304		$	14.67
Granted	44		36.92
Vested	(50	)	26.64
Forfeited	(10	)	28.29
Nonvested at December 31, 2018	288		$	30.05

As of December 31, 2018, 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 1.6 years. The total fair value of RSUs that vested was $1 million during 2018, $2 million during 2017 and $2 million during 2016.

STOCK OPTIONS

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, 2018 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, 2018	1,261		$	15.72	2.48	$	28
Exercised	(677	)	16.02
Canceled	(50	)	34.67
Outstanding, exercisable and vested at December 31, 2018	534		$	13.55	1.89	$	16



(millions)	2018		2017		2016
Intrinsic value of stock options exercised	$	17	$	7	$	4
Cash received from stock options exercised	$	11	$	14	$	4
Fair value of stock options vested	$	—	$	—	$	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.

KNAUF TRANSACTION

At the effective time of the Merger (as defined in Note 19, Merger Agreement), subject to certain exceptions, each MSU, performance share, and RSU that is outstanding immediately prior to the Merger will become fully vested. At the effective time of the Merger, these awards, along with each deferred stock unit, will be converted into the right to receive a cash payment equal to (i) the number of shares of our common stock earned on each underlying share, determined by substituting the closing consideration of $43.50 for the market value or the ending stock price in determining the achievement of the performance goal as applicable, multiplied by (ii) the closing consideration of $43.50 per share. Each stock option that is outstanding immediately prior to the Merger will be converted into the right to receive a cash payment equal to the (i) the number of shares of our common stock subject to such option at the effective time of the Merger, multiplied by (ii) the excess, if any, of the closing consideration of $43.50 per share over the exercise price of the option. A Dividend Make-Whole Amount Plan was approved by USG in connection with the Merger. See Note 19, Merger Agreement, for further discussion.