Financial Information

PART II

Item 8. Financial Statements and Supplementary Data.

MARRIOTT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6. 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 (“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.

In the Starwood Combination, we assumed Starwood’s 2013 Long-Term Incentive Compensation Plan (“Starwood LTIP”) and equity awards outstanding under the Starwood LTIP and other Starwood equity plans. On the Merger Date, we converted outstanding Starwood equity awards to equity awards for Marriott common stock. Those awards generally vest over three years in equal annual installments, subject to a prorated adjustment for employees who are terminated under certain circumstances or who retire or vest immediately upon a qualifying termination of employment following a change in control of Starwood to the extent set forth in the award agreements.

We recorded share-based compensation expense of $212 million in 2016, $113 million in 2015, and $109 million in 2014. Deferred compensation costs for unvested awards totaled $192 million at year-end 2016 (including $42 million related to awards assumed in the Starwood Combination) and $116 million at year-end 2015. As of year-end 2016, 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 $32 million in 2016, $34 million in 2015, and $92 million in 2014.

We received cash from the exercise of stock options of $2 million in 2016, $6 million in 2015, and $86 million in 2014.

RSUs and PSUs

We granted 2.8 million RSUs in 2016 to certain officers, key employees, and non-employee directors, 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. We granted 0.2 million PSUs in 2016 to certain executive officers, subject to continued employment and the satisfaction of certain performance conditions based on achievement of pre-established targets for Adjusted EBITDA, RevPAR Index, room openings, and/or net administrative expense over, or at the end of, a three-year performance period. We also granted 0.5 million PSUs in 2016 to certain senior leaders and members of the Company’s integration team that, subject to continued employment, vest based upon achievement of pre-established targets related to the Starwood Combination over, or at the end of, a three-year performance period.

We had deferred compensation costs for RSUs of approximately $188 million at year-end 2016 and $112 million at year-end 2015. The weighted average remaining term for RSU grants outstanding at year-end 2016 was two years.

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

The following table presents the changes in our outstanding RSU grants during 2016 and the associated weighted average grant-date fair values:

⁽¹⁾   Includes 0.7 million PSUs.

SARs

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 2016, $7 million in 2015, and $8 million in 2014. We had deferred compensation costs related to SARs of approximately $4 million in 2016 and $3 million in 2015. Upon the exercise of SARs, we issue shares from treasury shares.

The following table presents the changes in our outstanding SARs during 2016 and the associated weighted average exercise prices:

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:

Outstanding SARs had total intrinsic values of $196 million at year-end 2016 and $232 million at year-end 2015. Exercisable SARs had total intrinsic values of $179 million at year-end 2016 and $209 million at year-end 2015. SARs exercised during 2016 had total intrinsic values of $58 million, and SARs exercised in 2015 had total intrinsic values of $23 million.

We used the following assumptions to determine the fair value of the SARs we granted to employees and non-employee directors in 2016, 2015, and 2014:

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 dividend payout. The weighted average expected terms for SARs are an output of our valuation model which utilizes historical data in estimating the period of time that the SARs are expected to remain unexercised. We calculate the expected terms for SARs for separate groups of retirement eligible and non-retirement eligible employees and non-employee directors. Our valuation model also uses historical data to estimate exercise behaviors, which includes determining the likelihood that employees will exercise their SARs 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.

Other Information

At year-end 2016, we had 35 million remaining shares authorized under the Stock Plan and Starwood LTIP.