EQUITY-BASED COMPENSATION

Restricted Stock Units and Awards

Restricted stock units (RSUs) and restricted stock awards (RSAs) have been issued to certain employees and directors. Participants awarded RSUs do not receive dividends; therefore, the fair value is determined by reducing the closing market price of the Company’s ordinary shares on the date of grant by the present value of the estimated dividends had they been paid. The RSUs entitle the holder to receive one ordinary share for each RSU upon vesting, generally over three or four years. The fair value of RSAs is determined based on the closing market price of the Company’s ordinary shares at the date of grant. RSAs are issued and outstanding at the time of grant, but remain subject to forfeiture until vested, generally over three or four years. A summary of the RSU and RSA activity for 2015 follows:



(Restricted stock units and awards in millions)	Number of restricted stock units and awards		Weighted-average fair value per unit and award
Non-vested at January 1	2.8		$	60.11
Granted	1.1		67.46
Vested	(1.6	)	57.50
Forfeited	(0.2	)	66.94
Non-vested at December 31	2.1		$	65.06

Information related to RSUs and RSAs follows:



	2015		2014		2013
Pretax expense for RSUs and RSAs	$	68	$	81	$	69
After-tax expense for RSUs and RSAs	44		53		45
Fair value of vested RSUs and RSAs	110		105		82

As of December 31, 2015, total compensation expense not yet recognized related to non-vested RSUs and RSAs was $82, and the weighted-average period in which the expense is expected to be recognized is 2.7 years. Excess tax benefit for RSUs and RSAs totaled $5, and $10 for 2014 and 2013, respectively. There was no excess tax benefit for RSU's and RSA's in 2015.

Performance Share Units

In February 2015, the Compensation and Organization Committee of the Board of Directors approved the grant of performance share units (PSUs) to certain employees that vest based on the satisfaction of a three-year service period and the achievement of certain performance metrics over that same period. Upon vesting, PSU holders receive dividends that accumulate during the vesting period. The fair value of these PSUs is determined based on the closing market price of the Company's ordinary shares at the date of grant. Equity-based compensation expense is recognized over the period an employee is required to provide service based on the number of PSUs for which achievement of the performance objectives is probable. A summary of PSU activity for 2015 follows:



(Performance share units in millions)	Number of performance share units		Weighted-average fair value per unit
Non-vested at January 1	—		$	—
Granted	0.9		71.72
Vested	—		—
Forfeited	(0.1	)	71.72
Non-vested at December 31	0.8		$	71.72

Information related to PSUs follows:



	2015
Pretax expense for PSUs	$	2
After-tax expense for PSUs	1

As of December 31, 2015, total compensation expense not yet recognized related to non-vested PSUs was $5 and the weighted average period in which the expense is to be recognized is 2 years.

Stock Options

Under various plans, stock options have been granted to certain employees and directors to purchase ordinary shares at prices equal to fair market value on the date of grant. Substantially all of these options vest ratably during the three-year period following the date of grant and expire 10 years from the date of grant. Compensation expense is recognized for stock options based on the fair value of the options at the date of grant and amortized on a straight-line basis over the period the employee or director is required to provide service.

The Company uses a Black-Scholes option pricing model to estimate the fair value of stock options. The principal assumptions utilized in valuing stock options include the expected stock price volatility (based on the most recent historical period equal to the expected life of the option); the expected option life (an estimate based on historical experience); the expected dividend yield; and the risk-free interest rate (an estimate based on the yield of United States Treasury zero coupon with a maturity equal to the expected life of the option). A summary of the assumptions used in determining the fair value of stock options follows:



	2015			2014			2013
Expected volatility	29		%	34		%	36		%
Expected option life in years	5.5			5.5			5.5
Expected dividend yield	2.6		%	2.4		%	2.0		%
Risk-free interest rate	1.6 to 1.5%			1.7 to 1.5%			1.5 to 0.8%
Weighted-average fair value of stock options granted	$	15.25		$	19.46		$	17.49

A summary of stock option activity follows:



(Options in millions)	Weighted-average exercise price per option		Options		Weighted-average remaining contractual life in years	Aggregate intrinsic value
Outstanding at January 1, 2015	$	47.30	7.0
Granted	71.66		0.8
Exercised	37.91		(1.4	)
Forfeited and canceled	71.18		(0.2	)
Outstanding at December 31, 2015	$	51.94	6.2		4.3	$	36.2

Exercisable at December 31, 2015	$	47.23	5.0		3.3	$	36.2
Reserved for future grants at December 31, 2015			25.5

The aggregate intrinsic value in the table above represents the total excess of the $52.04 closing price of Eaton ordinary shares on the last trading day of 2015 over the exercise price of the stock option, multiplied by the related number of options outstanding and exercisable. The aggregate intrinsic value is not recognized for financial accounting purposes and the value changes based on the daily changes in the fair market value of the Company's ordinary shares.

Information related to stock options follows:



	2015		2014		2013
Pretax expense for stock options	$	12	$	12	$	11
After-tax expense for stock options	8		8		7
Proceeds from stock options exercised	52		54		121
Income tax benefit related to stock options exercised
Tax benefit classified in operating activities in the Consolidated Statements of Cash Flows	4		4		3
Excess tax benefit classified in financing activities in the Consolidated Statements of Cash Flows	1		15		22
Intrinsic value of stock options exercised	44		55		102
Total fair value of stock options vested	$	12	$	12	$	11

Stock options exercised, in millions of options	1.4		1.5		3.6

As of December 31, 2015, total compensation expense not yet recognized related to non-vested stock options was $11, and the weighted-average period in which the expense is expected to be recognized is 1.7 years.