Financial Information

MARRIOTT INTERNATIONAL, INC.
Notes to Consolidated Financial Statements

5. SHARE-BASED COMPENSATION

Under our Stock and Cash Incentive Plan (the “Stock Plan”), we award: (1) stock options (our “Stock Option Program”) to purchase our Class A Common Stock (our “common stock”); (2) stock appreciation rights (“SARs”) for our common stock (our “SAR Program”); (3) restricted stock units (“RSUs”) of our common stock; and (4) deferred stock units. We also issue performance-based RSUs (“PSUs”) to named executive officers and some of their direct reports under the Stock Plan. We grant awards at exercise prices or strike prices that equal the market price of our common stock on the date of grant.

During 2014, we granted 1.9 million RSUs, 0.3 million PSUs, 0.3 million SARs, and 0.1 million stock options.

We recorded share-based compensation expense for award grants of $109 million in 2014, $116 million in 2013, and $94 million in 2012. Deferred compensation costs for unvested awards totaled $114 million at year-end 2014 and $108 million at year-end 2013. As of year-end 2014, we expect to recognize these deferred compensation expenses over a weighted average period of two years.

We present the tax benefits and costs resulting from the exercise or vesting of share-based awards as financing cash flows. The exercise of share-based awards resulted in tax benefits of $92 million in 2014, $121 million in 2013, and $71 million in 2012.

We received cash from the exercise of stock options of $178 million in 2014, $199 million in 2013, and $179 million in 2012.

RSUs

We issue RSUs under the Stock Plan to certain officers and key employees, and those units vest generally over four years in equal annual installments commencing one year after the grant date. We recognize compensation expense for RSUs over the service period equal to the fair market value of the stock units on the date of issuance. Upon vesting, RSUs convert to shares of our common stock which we distribute from treasury shares. In addition to being subject to pro-rata annual vesting conditioned on continued service consistent with the standard form of RSUs, PSUs are also subject to the satisfaction of certain performance conditions based on achievement of pre-established targets for EBITDA, RevPAR Index, room openings, and net administrative expense over, or at the end of, a three-year vesting period. The following information on RSUs includes PSUs.

We had deferred compensation costs for RSUs of approximately $109 million at year-end 2014 and $102 million at year-end 2013. The weighted average remaining term for RSU grants outstanding at year-end 2014 was two years.

The following table provides additional information on RSUs for the last three fiscal years:

Financials

The following table presents the 2014 changes in our outstanding RSU grants and the associated weighted average grant-date fair values:

Financials

(1)  Includes 0.3 million PSUs granted to named executive officers.

Stock Options and SARs

We may grant employee stock options to officers and key employees at exercise prices or strike prices that equal the market price of our common stock on the grant date. Non-qualified options generally expire 10 years after the grant date, except those we issued from 1990 through 2000, which expire 15 years after their grant date. Most stock options under the Stock Option Program may be exercised in cumulative installments of one quarter at the end of each of the first four years following the grant date.

We recognized compensation expense for employee stock options of $2 million in 2014, $2 million in 2013, and $1 million in 2012. We had deferred compensation costs for employee stock options of $2 million at year-end 2014 and $2 million at year-end 2013. When holders exercise stock options we issue shares from treasury shares.

The following table presents the 2014 changes in our outstanding Stock Option Program awards and the associated weighted average exercise prices:

Financials

The following table presents the stock options issued under the Stock Option Program awards outstanding and exercisable at year-end 2014:

Financials

The following table presents the number of stock options we granted in the last three fiscal years and the associated weighted average grant-date fair values and weighted average exercise prices:

Financials

The following table presents the intrinsic value (the amount by which the market price of the underlying common stock exceeded the aggregate exercise price of the stock option) of all outstanding stock options and of exercisable stock options at year-end 2014 and 2013:

Financials

Stock options exercised during the last three years had total intrinsic values of approximately $160 million in 2014, $131 million in 2013, and $158 million in 2012.

We may grant SARs to officers and key employees (“Employee SARs”) at exercise prices or strike prices equal to the market price of our common stock on the grant date. Employee SARs expire ten years after the grant date and both vest and may be exercised in cumulative installments of one quarter at the end of each of the first four years following the grant date. We may grant SARs to directors (“Director SARs”) at exercise prices or strike prices equal to the market price of our common stock on the grant date. Director SARs generally expire ten years after the date of grant and vest upon grant; however, they are generally not exercisable until one year after grant. On exercise of SARs, holders receive the number of shares of our common stock equal to the number of SARs that are being exercised multiplied by the quotient of (a) the stock price on the date of exercise minus the exercise price, divided by (b) the stock price on the date of exercise.

We recognized compensation expense for Employee SARs and Director SARs of $8 million in 2014, $12 million in 2013, and $9 million in 2012. We had deferred compensation costs related to SARs of approximately $3 million in 2014 and $4 million in 2013. Upon the exercise of SARs, we issue shares from treasury shares.

The following table presents the 2014 changes in our outstanding SARs and the associated weighted average exercise prices:

Financials

The following tables show the number of Employee SARs and Director SARs we granted in the last three fiscal years, the associated weighted average exercise prices, and the associated weighted average grant-date fair values:

Financials

Outstanding SARs had total intrinsic values of $264 million at year-end 2014 and $111 million at year-end 2013. Exercisable SARs had total intrinsic values of $197 million at year-end 2014 and $82 million at year-end 2013. SARs exercised during 2014 had total intrinsic values of $33 million and SARs exercised in 2013 had total intrinsic values of $6 million.

We used the following assumptions to determine the fair value of the SARs and stock options we granted to employees and non-employee directors in 2014 and 2013, and to employees in 2012:

Financials

In making these assumptions, we base expected volatility on the historical movement of the Company’s stock price. We base risk-free rates on the corresponding U.S. Treasury spot rates for the expected duration at the date of grant, which we convert to a continuously compounded rate. The dividend yield assumption takes into consideration both historical levels and expectations of future payout. The weighted average expected terms for SARs and options are an output of our valuation model which utilizes historical data in estimating the period of time that the SARs and options are expected to remain unexercised. We calculate the expected terms for SARs and options for separate groups of retirement eligible and non-retirement eligible employees. Our valuation model also uses historical data to estimate exercise behaviors, which includes determining the likelihood that employees will exercise their SARs and options before expiration at a certain multiple of stock price to exercise price. In recent years, non-employee directors have generally exercised grants in their last year of exercisability.

Deferred Stock Units

We also issue deferred stock units to non-employee directors. These non-employee directors deferred stock units vest within one year and are distributed upon election.

The following table presents the share-based compensation expense, the number of deferred stock units we granted, the weighted average grant-date fair value, and the aggregate intrinsic value for the last three fiscal years for non-employee director deferred stock units:

Financials

We had 268,000 outstanding non-employee deferred stock units at year-end 2014, and 261,000 outstanding at year-end 2013. The weighted average grant-date fair value of those outstanding deferred stock units was $30 for 2014 and $22 for 2013.

Other Information

At year-end 2014, we had authorized 27 million shares under the Stock Plan, including 6 million shares under the Stock Option Program and the SAR Program.

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