Share-Based Compensation

Chesapeake’s share-based compensation program consists of restricted stock, stock options and performance share units (PSUs) granted to employees and restricted stock granted to non-employee directors under our Long Term Incentive Plan. The restricted stock and stock options are equity-classified awards and the PSUs are liability-classified awards.

Share-Based Compensation Plans

Under Chesapeake's Long Term Incentive Plan, restricted stock, stock options, stock appreciation rights, performance shares, performance share units and other stock awards may be awarded to employees, directors and consultants of Chesapeake. Subject to any adjustments as provided by the plan, the aggregate number of shares of common stock available for awards under the plan may not exceed 59,300,000 shares. The maximum period for exercise of an option or stock appreciation right may not be more than ten years from the date of grant, and the exercise price may not be less than the fair market value of the shares underlying the option or stock appreciation right on the date of grant. Awards granted under the plan become vested at specified dates or upon the satisfaction of certain performance or other criteria determined by a committee of the Board of Directors. No awards may be granted under the plan after September 30, 2014. The plan has been approved by our shareholders. There were 147,108, 170,151 and 68,824 shares of restricted stock issued to our non-employee directors under the plan in 2013, 2012 and 2011, respectively. Additionally, there were 2.5 million, 5.0 million and 4.5 million restricted stock issued, net of forfeitures, to employees and consultants during 2013, 2012 and 2011, respectively, under the plan. As of December 31, 2013, there were 12.7 million shares remaining available for issuance under the plan.

Chesapeake's 2003 Stock Incentive Plan terminated in April 2013. Restricted stock was awarded to employees and consultants of Chesapeake under the plan prior to its termination. Subject to any adjustments as provided by the plan, the aggregate number of shares available for awards under the plan was limited to 10,000,000 shares. Restricted stock became vested at dates determined by a committee of the Board of Directors. The plan was approved by our shareholders. There were nominal amounts of restricted stock, net of forfeitures, issued under the plan during 2013 and 2012 and 0.4 million restricted stock, net of forfeitures, issued under the plan during 2011.

Under Chesapeake's 2003 Stock Award Plan for Non-Employee Directors, a maximum of 10,000 shares of Chesapeake's common stock are awarded to each newly appointed non-employee director on his or her first day of service. Subject to any adjustments as provided by the plan, the aggregate number of shares which may be issued may not exceed 250,000 shares. This plan has been approved by our shareholders. In 2013, 2012 and 2011, 20,000, 30,000 and 10,000 shares, respectively, of common stock were awarded to new directors under the plan. As of December 31, 2013, there were 130,000 shares remaining available for issuance under the plan.

Equity-Classified Awards

Restricted Stock. We grant restricted stock to employees and non-employee directors. Restricted stock vests over a minimum of three years and the holder receives dividends or dividend equivalents on unvested shares. A summary of the changes in unvested shares of restricted stock during 2013, 2012 and 2011 is presented below.



	Number of Unvested Restricted Shares		Weighted Average Grant Date Fair Value
	(in thousands)
Unvested shares as of January 1, 2013	18,899		$	23.72
Granted	9,189		$	19.68
Vested	(12,897	)	$	21.32
Forfeited	(1,791	)	$	22.86
Unvested shares as of December 31, 2013	13,400		$	23.38

Unvested shares as of January 1, 2012	19,544		$	26.97
Granted	9,480		$	21.13
Vested	(8,620	)	$	28.08
Forfeited	(1,505	)	$	24.57
Unvested shares as of December 31, 2012	18,899		$	23.72

Unvested shares as of January 1, 2011	21,375		$	28.68
Granted	9,541		$	28.38
Vested	(10,401	)	$	31.76
Forfeited	(971	)	$	27.28
Unvested shares as of December 31, 2011	19,544		$	26.97

The aggregate intrinsic value of restricted stock that vested during 2013 was approximately $342 million based on the stock price at the time of vesting.

As of December 31, 2013, there was $195 million of total unrecognized compensation cost related to unvested restricted stock. The cost is expected to be recognized over a weighted average period of approximately 3.6 years.

The vesting of certain restricted stock grants may result in state and federal income tax benefits related to the difference between the market price of the common stock at the date of vesting and the date of grant. During 2013, 2012 and 2011, we recognized reductions in tax benefits related to restricted stock of $14 million, $32 million and $23 million, respectively, which were recorded as adjustments to additional paid-in capital and deferred income taxes.

Stock Options. In 2013, we granted members of our senior management team stock options that will vest ratably over a three-year period. We also granted retention awards to certain officers of stock options that will vest one-third on each of the third, fourth and fifth anniversaries of the grant date. Each stock option award has an exercise price equal to the closing price of the Company’s common stock on the grant date. Prior to 2006, we had granted stock options under several stock compensation plans which vested over a four-year period. Outstanding options expire ten years from the date of grant.

We utilized the Black-Scholes option pricing model to measure the fair value of the stock options that were granted in 2013. The expected life of an option is determined using the "simplified method", as there is not adequate historical exercise behavior available. Volatility assumptions are estimated based on an average of historical volatility over the expected life of an option. The risk-free interest rate is based on the U.S. Treasury rate in effect at the time of the grant over the expected life of the option. The dividend yield is based on an annual dividend yield, taking into account the Company's current dividend policy over the expected life of the option. The Company used the following weighted-average assumptions to estimate the fair value of the stock options granted in 2013:



Expected option life - years	6.49
Volatility	48.47	%
Risk-free interest rate	1.30	%
Dividend yield	1.82	%

The following table provides information related to stock option activity for 2013, 2012 and 2011:



	Number of Shares Underlying Options		Weighted Average Exercise Price Per Share		Weighted Average Contract Life in Years	Aggregate Intrinsic Value^(a)
	(in thousands)					($ in millions)
Outstanding at January 1, 2013	481		$	12.69	0.96	$	2
Granted	5,264		$	19.32
Exercised	(346	)	$	10.82		$	11
Expired	(131	)	$	19.31
Outstanding at December 31, 2013	5,268		$	19.28	6.66	$	41

Exercisable at December 31, 2013	1,552		$	18.82	1.97	$	13

Outstanding at January 1, 2012	1,051		$	9.84	1.41	$	13
Exercised	(570	)	$	7.45		$	7
Outstanding and exercisable at December 31, 2012	481		$	12.69	0.96	$	2

Outstanding at January 1, 2011	1,808		$	8.90	2.03	$	31
Exercised	(757	)	$	7.59		$	15
Outstanding and exercisable at December 31, 2011	1,051		$	9.84	1.41	$	13

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(a)	The intrinsic value of a stock option is the amount by which the current market value or the market value upon exercise of the underlying stock exceeds the exercise price of the option.

As of December 31, 2013, there was $16 million of total unrecognized compensation cost related to stock options. The cost is expected to be recognized over a weighted average period of approximately 2.5 years.

The vesting of certain stock option grants may result in state and federal income tax benefits related to the difference between the market price of the common stock at the date of vesting and the date of grant. During the years ended December 31, 2013 and 2012, we recognized excess tax benefits related to stock options of $1 million and $2 million, respectively. During the year ended December 31, 2011, we recognized a reduction in tax benefits related to stock options of $3 million. All amounts were recorded as adjustments to additional paid-in capital and deferred income taxes.

We recorded the following compensation related to restricted stock and stock options during the years ended December 31, 2013, 2012 and 2011:



	Years Ended December 31,
	2013		2012		2011
	($ in millions)
Natural gas and oil properties	$	52	$	71	$	112
General and administrative expenses	60		71		92
Natural gas, oil and NGL production expenses	21		24		33
Marketing, gathering and compression expenses	7		15		17
Oilfield services expenses	10		10		11
Total	$	150	$	191	$	265

Liability-Classified Awards

Performance Share Units. In 2012 and 2013, we granted PSUs to senior management under our Long Term Incentive Plan which settle in cash at the end of their respective performance periods and which vest ratably over their respective terms. The 2012 awards were granted in one, two and three-year tranches and are settled in cash on the first, second and third anniversary dates of the awards, and the 2013 awards are settled in cash on the third anniversary of the awards. The ultimate number of units earned is based on the achievement of relative and absolute total shareholder return (TSR) and production and proved reserve growth performance goals. The market condition is a function of TSR, and generally requires a Monte Carlo simulation to determine the fair value.

For PSUs granted in 2012, each of the TSR and operational payout components can range from 0% to 125% resulting in a maximum total payout of 250%. For PSUs granted in 2013, the TSR component can range from 0% to 125% and each of the two operational components can range from 0% to 62.5%; however, the maximum total payout is capped at 200% in all cases and at 100% in situations where the Company’s absolute TSR is less than zero. The following table presents a summary of our PSU awards as of December 31, 2013:



	Units	Fair Value as of Grant Date		Fair Value		Liability for Vested Amount
		($ in millions)
2012 Awards ^(a)
Payable 2014	278,083	$	8	$	11	$	11
Payable 2015	834,248	23		31		30
Total 2012 Awards	1,112,331	$	31	$	42	$	41

2013 Awards
Payable 2016	1,600,438	$	35	$	58	$	49

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(a)	In 2013, we paid $2 million related to 2012 PSU awards.

We recorded the following compensation related to PSUs during the years ended December 31, 2013, 2012 and 2011:



	Years Ended December 31,
	2013		2012		2011
	($ in millions)
Natural gas and oil properties	$	9	$	4	$	—
General and administrative expenses	34		8		—
Natural gas, oil and NGL production expenses	2		1		—
Marketing, gathering and compression expenses	2		1		—
Oilfield services expenses	1		—		—
Total	$	48	$	14	$	—