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Employee Compensation and Benefit Plans
12 Months Ended
Dec. 31, 2015
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
Employee Compensation and Benefit Plans
Note 22 — Employee Compensation and Benefit Plans
We maintain a defined contribution plan to provide post-retirement benefits to our eligible employees. We also maintain additional compensation plans for certain employees. We designed these plans to facilitate a pay-for-performance culture, further align the interests of our officers and key employees with the interests of our shareholders and assist in attracting and retaining employees vital to our long-term success. These plans are summarized below.
Retirement Plan
We maintain a defined contribution 401(k) plan. Generally, we match 50% of each employee’s contributions, limited to 2% of the employee’s compensation. Our contributions to the 401(k) plan were $4.7 million, $3.8 million and $4.2 million for the years ended December 31, 2015, 2014 and 2013, respectively.
Annual Incentive Plan
The Ocwen Financial Corporation Amended 1998 Annual Incentive Plan and the 2007 Equity Incentive Plan (the 2007 Equity Plan) are our primary incentive compensation plans for executives and other eligible employees. Under the terms of these plans, participants can earn cash and equity-based awards as determined by the Compensation Committee of the Board of Directors (the Committee). The awards are based on objective and subjective performance criteria established by the Committee. The Committee may at its discretion adjust performance measurements to reflect significant unforeseen events. We recognized $30.2 million, $13.5 million and $28.4 million of compensation expense during 2015, 2014 and 2013, respectively, related to annual incentive compensation awarded in cash.
The 2007 Equity Plan authorizes the grant of stock options, restricted stock or other equity-based awards to employees. At December 31, 2015, there were 7,702,134 shares of common stock remaining available for future issuance under the 2007 Equity Plan. Beginning in 2008, Ocwen granted equity-based awards to certain members of senior management that included stock options, a portion of which included only a service condition and a portion of which included only a market condition. Beginning in 2015, Ocwen began granting equity awards to members of senior management that included stock options with only a service condition, restricted stock units with only a service condition and restricted stock units with both a service condition and a market condition. These awards had the following characteristics in common:
Type of Award
 
Percent of Options Awarded
 
Vesting Period
2008 - 2014 Awards:
 
 
 
 
Options:
 
 
 
 
Service Condition:
 
 
 
 
Time-based
 
25%
 
Ratably over four years (¼ on each of the four anniversaries of the grant date)
Market Condition:
 

 

Market performance-based
 
50
 
Over three years beginning with ¼ vesting on the date that the stock price has at least doubled over the exercise price and the compounded annual gain over the exercise price is at least 20% and then ratably over three years (¼ on the next three anniversaries of the achievement of the market condition)
Extraordinary market performance-based
 
25
 
Over three years beginning with ¼ vesting on the date that the stock price has at least tripled over the exercise price and the compounded annual gain over the exercise price is at least 25% and then ratably over three years (¼ on the next three anniversaries of the achievement of the market condition)
Total award
 
100%
 
 
 
 
 
 
 
2015 Awards:
 
 
 
 
Options:
 
 
 
 
Service Condition:
 
 
 
 
Time-based
 
35%
 
Ratably over four years (1/4 vesting on each of the four anniversaries of the grant date.)
Restricted Stock Units:
 
 
 
 
Service Condition:
 
 
 
 
Time-based
 
16
 
Over four years with 1/3 vesting on each of the 2nd, 3rd and 4th anniversaries of the grant date.
Market Condition:
 
 
 
 
Time-based vesting schedule and Market performance-based vesting date
 
49
 
Vest over four years with 1/4 vesting on each of the four anniversaries of the grant date. However, none are considered vested until the first trading day (if any) on or before the 4th anniversary of the award date on which the average stock price equals or exceeds the price set in the individual award agreement, at which time all units that have met their time-based vesting schedule vest immediately with the remainder vesting in accordance with their time-based schedule.
Total Award
 
100%
 
 

The contractual term of all options granted is ten years from the grant date, except where employment terminates by reason of death, disability or retirement, in which case, the agreement may provide for an earlier termination of the options. The terms of the market-based options do not include a retirement provision. Restricted stock units have a four-year term. If the market conditions are not met by the fourth anniversary of the award of restricted stock units, those units terminate on that date.
Stock option activity for the years ended December 31:
 
2015
 
2014
 
2013
 
Number of
Options
 
Weighted
Average
Exercise
Price
 
Number of
Options
 
Weighted
Average
Exercise
Price
 
Number of
Options
 
Weighted
Average
Exercise
Price
Outstanding at beginning of year
6,828,861

 
$
9.99

 
8,182,611

 
$
10.62

 
8,938,179

 
$
9.93

Granted (1)(2)
968,041

 
$
17.48

 
330,000

 
$
34.48

 
50,000

 
$
51.70

Exercised (3)(4)
(145,677
)
 
$
5.24

 
(683,750
)
 
$
8.30

 
(790,568
)
 
$
5.35

Forfeited/Canceled (1) (2)
(500,000
)
 
$
24.38

 
(1,000,000
)
 
$
24.38

 
(15,000
)
 
$
15.27

Outstanding at end of year (5)(6)
7,151,225

 
$
10.10

 
6,828,861

 
$
9.99

 
8,182,611

 
$
10.62

 
 
 
 
 
 
 
 
 
 
 
 
Exercisable at end of year (5)(6)(7)
6,187,559

 
$
8.25

 
5,750,739

 
$
6.84

 
5,733,864

 
$
6.53

 
(1)
Stock options granted in 2012 include 2,000,000 options granted to Ocwen’s former Executive Chairman, William C. Erbey at an exercise price of $24.38 equal to the closing price of the stock on the day of the Committee’s approval. On April 22, 2014, Mr. Erbey surrendered 1,000,000 of these options. We recognized the remaining $5.7 million of previously unrecognized compensation expense associated with these options as of the date of surrender.
(2)
Upon Mr. Erbey’s resignation as an officer and director of Ocwen on January 16, 2015, 500,000 of his unvested options would have been forfeited immediately. However, Ocwen agreed to modify the awards to allow them to vest. This had an effect equivalent to the canceling of the original awards and the granting of new awards effective on the date of resignation.
(3)
The total intrinsic value of stock options exercised, which is defined as the amount by which the market value of the stock on the date of exercise exceeds the exercise price, was $0.3 million, $13.7 million and $35.3 million for 2015, 2014 and 2013, respectively.
(4)
In connection with the exercise of stock options during 2015, 2014 and 2013, employees delivered 56,013, 249,696 and 138,553 shares, respectively, of common stock to Ocwen as payment for the exercise price and the income tax withholdings on the compensation. As a result, a total of 89,664, 434,054 and 652,015 net shares of stock were issued in 2015, 2014 and 2013, respectively, related to the exercise of stock options.
(5)
Excluding 340,000 market-based options that have not met their performance criteria, the net aggregate intrinsic value of stock options outstanding and stock options exercisable at December 31, 2015 was $0 and $0, respectively. A total of 4,722,814 market-based options were outstanding at December 31, 2015, of which 4,377,814 were exercisable.
(6)
At December 31, 2015, the weighted average remaining contractual term of options outstanding and options exercisable was 3.93 years and 3.22 years, respectively.
(7)
The total fair value of the stock options that vested and became exercisable during 2015, 2014 and 2013, based on grant-date fair value, was $2.0 million, $2.6 million and $4.7 million, respectively.
In addition to the stock option grants shown above, Ocwen granted a total of 790,397 restricted stock units to members of senior management in 2015. Of these awards, 584,438 include a market condition for vesting based on an average common stock trading price of $16.26.
Compensation expense related to options is measured based on the grant-date fair value of the options using an appropriate valuation model based on the vesting condition of the award. The fair value of the time-based options was determined using the Black-Scholes options pricing model, while a lattice (binomial) model was used to determine the fair value of the market-based options. Lattice (binomial) models incorporate ranges of assumptions for inputs. Restricted stock units with only a service condition are valued at their intrinsic value, which is the market value of the stock on the date of the award. The fair value of restricted stock units with both a service condition and a market based vesting condition is based on the results of a Monte Carlo simulation.
The following assumptions were used to value awards granted during the years ended December 31:
 
2015
 
2014
 
2013
 
Black-Scholes
 
Binomial
 
Monte Carlo
 
Black-Scholes
 
Binomial
 
Black-Scholes
 
Binomial
Risk-free interest rate
1.60% – 2.08%
 
0.20% - 2.74%
 
1.23%
 
1.98% – 2.60%
 
0% - 3.05%
 
2.32%
 
0.24% - 3.56%
Expected stock price volatility (1)
45%
 
51% - 108%
 
65%
 
42%
 
41% - 42%
 
44%
 
33% - 44%
Expected dividend yield
—%
 
—%
 
—%
 
—%
 
—%
 
—%
 
—%
Expected life (in years) (2)
5.50
 
5.41 - 5.46
 
(3)
 
6.50
 
4.35 - 5.64
 
6.50
 
4.50 - 5.75
Contractual life (in years)
 
10
 
 
 
10
 
 
10
Fair value
$3.36 - $4.62
 
$5.41 - $5.46
 
$7.99
 
$11.93 - $17.01
 
$8.99 - $13.82
 
$24.32
 
$18.04 - $21.38
(1)
We estimate volatility based on the historical volatility of Ocwen’s common stock over the most recent period that corresponds with the estimated expected life of the option.
(2)
For the options valued using the Black-Scholes model we determined the expected life based on historical experience with similar awards, giving consideration to the contractual term, exercise patterns and post vesting forfeitures. The expected term of the options valued using the lattice (binomial) model is derived from the output of the model. The lattice (binomial) model incorporates exercise assumptions based on analysis of historical data. For all options, the expected life represents the period of time that options granted were expected to be outstanding at the date of the award.
(3)
The restricted stock units that contain both a service condition and a market-based condition are valued using the Monte Carlo simulation. The expected term is derived from the output of the simulation and represents the expected time to meet the market-based vesting condition. For equity awards with both service and market conditions, the requisite service period is the longer of the derived or explicit service period. In this case, the explicit service condition (vesting period) is the requisite service period, and the graded vesting method is used for expense recognition.
The following table sets forth equity-based compensation related to stock options and stock awards and the related excess tax benefit for the years ended December 31:
 
2015
 
2014
 
2013
Equity-based compensation expense:
 
 
 
 
 
Stock option awards
$
3,978

 
$
9,983

 
$
5,388

Stock awards
3,313

 
746

 
260

Excess tax benefit related to share-based awards
6,824

 
6,374

 
21,244


As of December 31, 2015, unrecognized compensation costs related to non-vested stock options amounted to $4.9 million, which will be recognized over a weighted-average remaining requisite service period of 1.92 years.