STOCK PLANS

Share-based compensation

The Company accounts for share-based compensation utilizing fair value. The Consolidated Statement of Income for the years ended December 31, 2014, 2013, and 2012, reflects share-based compensation expense of $21 million, $18 million, and $16 million, respectively. The total tax benefit recognized in earnings from share-based compensation arrangements for the years ended December 31, 2014, 2013, and 2012, was not material. As of December 31, 2014, there was $33 million of total unrecognized compensation cost related to share-based compensation arrangements, which is expected to be recognized over a weighted-average period of 1.1 years.

Restricted stock units and stock grants

Under the Company’s Amended and Restated 2007 Equity Incentive Plan (“2007 Equity Plan”), it granted restricted stock units (“RSUs”) to certain Employees during 2012, 2013, and 2014 and performance-based restricted stock units (“PBRSUs”) to certain Employees during 2014. The fair value of RSUs and PBRSUs is based on the closing price of the Company’s common stock on the date of grant. Outstanding RSUs vest over three years, subject generally to the individual’s continued employment or service. The PBRSUs vest on May 14, 2017, subject to the Company’s performance with respect to a three-year simple average of Return on Invested Capital, before taxes and excluding special items ("ROIC"), for the period beginning on January 1, 2014 and ending on December 31, 2016, and the individual’s continued employment or service. The number of PBRSUs vesting on the vesting date will be interpolated based on the average ROIC for the defined performance period, and ranges from zero PBRSUs at an average ROIC of 12 percent or lower to 200 percent of granted PBRSUs at an average ROIC of 20 percent or higher. The Company recognizes all expense on a straight-line basis over the vesting period, with any changes in expense due to the number of PBRSUs expected to vest being modified on a prospective basis.

In addition, the Company granted approximately 36 thousand shares of unrestricted stock at a weighted average grant price of $24.91 in 2014, approximately 63 thousand shares at a weighted average grant price of $14.34 in 2013, and approximately 82 thousand shares at a weighted average grant price of $8.21 in 2012, to members of its Board of Directors. The fair value of unrestricted stock grants is also based on the closing price of the Company’s common stock on the date of grant.

A remaining balance of up to ten million shares of the Company’s common stock may be issued pursuant to grants under the 2007 Equity Plan. Aggregated information regarding the Company’s RSUs and PBRSUs is summarized below:



	All Restricted Stock Units
	Units (000)			Wtd. Average Fair Value (per share)
Outstanding December 31, 2011, Unvested	1,640			$	12.27
Granted	1,939			8.21
Vested	(644	)		12.27
Surrendered	(59	)		10.54
Outstanding December 31, 2012	2,876			9.57
Granted	1,139			14.34
Vested	(1,263	)		10.24
Surrendered	(168	)		9.11
Outstanding December 31, 2013	2,584			11.38
Granted	834		(a)	24.93
Vested	(1,239	)		11.05
Surrendered	(102	)		13.18
Outstanding December 31, 2014, Unvested	2,077			$	16.92

(a) Includes 198 thousand shares of PBRSUs

Stock options

The Company has previously awarded stock options under plans covering Employees subject to collective bargaining agreements (collective bargaining plans) and plans covering other Employees and members of the Board of Directors (other Employee plans). None of the collective bargaining plans were required to be approved by Shareholders. Options granted to Employees under collective bargaining plans are non-qualified, granted at or above the fair value of the Company’s common stock on the date of grant, and generally have terms ranging from six to twelve years. There were no material grants of stock options to Employees covered by collective bargaining plans during 2012, 2013, or 2014, and no future option grants from these plans are possible. Neither Executive Officers nor members of the Company’s Board of Directors are eligible to participate in any of the collective bargaining plans. Options granted to Employees and members of the Board of Directors through other Employee plans are both qualified as incentive stock options under the Internal Revenue Code of 1986 and non-qualified stock options, granted at no less than the fair value of the Company’s common stock on the date of grant, and have 10-year terms. All of the options included in other Employee plans have been approved by Shareholders, except one plan covering non-management, non-contract Employees, which did not require Shareholder approval and had an insignificant number of options outstanding as of December 31, 2014. Although the Company does not have a formal policy, upon option exercise, the Company will typically issue treasury stock, to the extent such shares are available.

For other Employee plans, options vest and generally become fully exercisable over three, five, or ten years of continued employment, depending upon the grant type. For grants in any of the Company’s plans that are subject to graded vesting over a service period, the Company recognizes expense on a straight-line basis over the requisite service period for the entire award. None of the Company’s stock option grants include performance-based or market-based vesting conditions, as defined.

The Black-Scholes option valuation model was developed for use in estimating the fair value of short-term traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of subjective assumptions including expected stock price volatility. The Company estimates expected stock price volatility via observations of both historical volatility trends as well as implied future volatility observations as determined by independent third parties. Stock options issued by the Company during 2014, 2013, and 2012 were immaterial.

Aggregated information regarding Company issued stock options is summarized below:



	Stock Option Plans
	Options (000)		Wtd. average exercise price		Wtd. average remaining contractual term (years)	Aggregate intrinsic value (millions)
Outstanding December 31, 2011	47,324		$	14.51
Granted	6		9.00
Exercised	(573	)	8.00
Surrendered	(27,847	)	14.85
Outstanding December 31, 2012	18,910		$	14.19
Granted	—		—
Exercised	(6,633	)	13.31
Surrendered	(3,116	)	14.94
Outstanding December 31, 2013	9,161		$	14.58
Granted	—		—
Exercised	(6,636	)	14.36
Surrendered	(48	)	15.74
Outstanding December 31, 2014	2,477		$	15.17	1.62	$	67
Vested or expected to vest at December 31, 2014	2,473		$	15.16	1.63	$	67
Exercisable at December 31, 2014	2,308		$	15.05	1.67	$	63

The total aggregate intrinsic value of options exercised for all plans during the years ended December 31, 2014, 2013, and 2012, was $75 million, $22 million, and $1 million, respectively. The total grant date fair value of shares vesting during the years ended December 31, 2014, 2013, and 2012, was $15 million, $16 million, and $13 million, respectively.

Employee Stock Purchase Plan

Under the amended 1991 Employee Stock Purchase Plan (ESPP), which has been approved by Shareholders, the Company is authorized to issue up to a remaining balance of 11 million shares of the Company’s common stock to Employees of the Company. These shares may be issued at a price equal to 90 percent of the market value at the end of each monthly purchase period. Common stock purchases are paid for through periodic payroll deductions. For the years ended December 31, 2014, 2013, and 2012, participants under the plan purchased 792 thousand shares, 1.5 million shares, and 2.2 million shares at average prices of $23.17, $12.03, and $8.01, respectively. The weighted-average fair value of each purchase right under the ESPP granted for the years ended December 31, 2014, 2013, and 2012, which is equal to the ten percent discount from the market value of the Common Stock at the end of each monthly purchase period, was $2.68, $1.34, and $0.89, respectively.

Taxes

A portion of the Company’s granted options qualify as incentive stock options for income tax purposes. As such, a tax benefit is not recorded at the time the compensation cost related to the options is recorded for book purposes due to the fact that an incentive stock option does not ordinarily result in a tax benefit unless there is a disqualifying disposition. Grants of non-qualified stock options result in the creation of a deferred tax asset, which is a temporary difference, until the time that the option is exercised. Due to the treatment of incentive stock options for tax purposes, the Company’s effective tax rate from year to year is subject to variability.