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 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 2016 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	2.1		$	65.06
Granted	1.6		52.80
Vested	(0.9	)	64.11
Forfeited	(0.2	)	59.89
Non-vested at December 31	2.6		$	57.87

Information related to RSUs and RSAs follows:



	2016		2015		2014
Pretax expense for RSUs and RSAs	$	65	$	68	$	81
After-tax expense for RSUs and RSAs	42		44		53
Fair value of vested RSUs and RSAs	71		110		105

As of December 31, 2016, total compensation expense not yet recognized related to non-vested RSUs and RSAs was $87, and the weighted-average period in which the expense is expected to be recognized is 2.5 years. Excess tax benefit for RSUs and RSAs totaled $5 for 2014. There was no excess tax benefit for RSUs and RSAs in 2016 and 2015.

Performance Share Units

In February 2016, 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 total shareholder return relative to that of a group of peers. Awards earned at the end of the three-year vesting period range from 0% to 200% of the targeted number of PSUs granted based on the ranking of total shareholder return of the Company, assuming reinvestment of all dividends, relative to a defined peer group of companies. Equity-based compensation expense for these PSUs is recognized over the period during which an employee is required to provide service in exchange for the award. Upon vesting, dividends that have accumulated during the vesting period are paid on earned awards.

The Company uses a Monte Carlo simulation to estimate the fair value of PSUs with market conditions. The principal assumptions utilized in valuing these PSUs include the expected stock price volatility (based on the most recent 3-year period as of the grant date) and the risk-free interest rate (an estimate based on the yield of United States Treasury zero coupon bonds with a 3-year maturity as of the grant date). A summary of the assumptions used in determining fair value of these PSUs follows:



	2016
Expected volatility	24		%
Risk-free interest rate	0.88		%
Weighted-average fair value of PSUs granted	$	76.41

A summary of the 2016 activity for these PSUs follows:



(Performance share units in millions)	Number of performance share units		Weighted-average fair value per unit
Non-vested at January 1	—		$	—
Granted¹	0.6		76.41
Vested	—		—
Forfeited	(0.1	)	76.41
Non-vested at December 31	0.5		$	76.41

¹ Performance shares granted assuming the Company will perform at target relative to peers.

In February 2016 and 2015, performance share units were granted to certain employees that entitles the holder to receive one ordinary share for each PSU 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 the 2016 activity for these PSUs follows:



(Performance share units in millions)	Number of performance share units		Weighted-average fair value per unit
Non-vested at January 1	0.8		$	71.72
Granted	0.1		56.55
Vested	—		—
Forfeited	(0.2	)	71.72
Non-vested at December 31	0.7		$	68.23

Information related to PSUs follows:



	2016		2015
Pretax expense for PSUs	$	13	$	2
After-tax expense for PSUs	8		1

As of December 31, 2016, total compensation expense not yet recognized related to non-vested PSUs was $30 and the weighted average period in which the expense is to be recognized is 2 years. There was no excess tax benefit for PSUs in 2016 and 2015.

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:



	2016			2015			2014
Expected volatility	27		%	29		%	34		%
Expected option life in years	5.5			5.5			5.5
Expected dividend yield	2.5		%	2.6		%	2.4		%
Risk-free interest rate	1.2 to 1.5%			1.6 to 1.5%			1.7 to 1.5%
Weighted-average fair value of stock options granted	$	11.80		$	15.25		$	19.46

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, 2016	$	51.94	6.2
Granted	56.73		1.3
Exercised	40.32		(1.9	)
Forfeited and canceled	65.74		(0.1	)
Outstanding at December 31, 2016	$	56.75	5.5		5.6	$	64.5

Exercisable at December 31, 2016	$	54.28	3.7		4.0	$	51.3
Reserved for future grants at December 31, 2016			18.6

The aggregate intrinsic value in the table above represents the total excess of the $67.09 closing price of Eaton ordinary shares on the last trading day of 2016 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:



	2016		2015		2014
Pretax expense for stock options	$	14	$	12	$	12
After-tax expense for stock options	9		8		8
Proceeds from stock options exercised	74		52		54
Income tax benefit related to stock options exercised
Tax benefit classified in operating activities in the Consolidated Statements of Cash Flows	5		4		4
Excess tax benefit classified in financing activities in the Consolidated Statements of Cash Flows	1		1		15
Intrinsic value of stock options exercised	42		44		55
Total fair value of stock options vested	$	14	$	12	$	12

Stock options exercised, in millions of options	1.9		1.4		1.5

As of December 31, 2016, total compensation expense not yet recognized related to non-vested stock options was $10.6, and the weighted-average period in which the expense is expected to be recognized is 1.9 years.