Stock Compensation Plans

Our 2002 Performance Plan and 2005 Performance Plan (collectively the “Plans”) permitted grants of performance share units, stock options, stock appreciation rights (“SARs”), and restricted stock to employees. The Plans expired on April 15, 2005 and April 26, 2008, respectively, except for grants then outstanding. Our 2008 Performance Plan, which was adopted on April 8, 2008 and is due to expire on April 8, 2018, permits the grant of performance share units, stock options, SARs, restricted stock, restricted stock units, other stock-based grants and awards and cash-based grants and awards to employees and directors. A total of 8,000,000 shares of our common stock may be issued in respect of grants made under the 2008 Performance Plan. Any shares of common stock that are subject to awards of stock options or SARs will be counted as one share for each share granted for purposes of the aggregate share limit and any shares of common stock that are subject to any other awards will be counted as 1.61 shares for each share granted for purposes of the aggregate share limit. In addition, shares of common stock that are subject to awards issued under the 2008 Performance Plan or certain prior equity compensation plans that expire according to their terms or are forfeited, terminated, canceled or surrendered or are settled, or can be paid, only in cash will be available for issuance pursuant to a new grant or award under the 2008 Performance Plan. Shares issued under our stock-based compensation plans are usually issued from shares of our common stock held in treasury.

Stock Options

Grants of stock options and SARs (collectively referred to as “options”) under the Plans and the 2008 Performance Plan generally have a graded vesting period of four years whereby one-fourth of the awards vest on each of the first four anniversaries of the grant date, an exercise price equal to the fair market value of one share of our common stock on the date of grant (calculated as the average of the high and low price on that date or, with respect to the 2008 Performance Plan, the closing market price on that date) and a contractual term of ten years. The exercise of tandem SARs cancels an equivalent number of stock options and conversely, the exercise of stock options cancels an equivalent number of tandem SARs. Option grants are cancelled on, or 90 days following, termination of employment unless termination is due to retirement, death or disability under certain circumstances, in which case, all outstanding options vest fully and remain outstanding for a term set forth in the related grant agreement.

Under the Plans, the exercise of certain stock options through a share swap, whereby the employee exercising the stock options tenders shares of our common stock then owned by such employee towards the exercise price plus taxes, if any, due from such employee, results in an immediate grant of new options (hereinafter referred to as “reload” options) equal to the number of shares so tendered plus any shares tendered to satisfy the employee’s income tax obligations on the transaction. Each such grant of reload options vests on the first anniversary of its respective grant date, has an exercise price equal to the fair market value of one share of our common stock on the date of grant (calculated as the average of the high and low price on that date) and a contractual term equal to the remaining contractual term of the original option. The subsequent exercise of such reload options through a share swap does not result in the grant of any additional reload options. The 2008 Performance Plan does not permit the grant of reload options.

The following table summarizes the activity related to options during 2012:



	Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (In millions)
Outstanding at January 1	12,787,824		$	14.84
Options granted	2,004,429		12.79
Options exercised	(513,910	)	7.98			$	2
Options expired	(140,502	)	8.89
Options cancelled	(608,979	)	17.34
Outstanding at December 31	13,528,862		14.75		5.5	26
Vested and expected to vest at December 31	13,049,005		14.84		5.3	24
Exercisable at December 31	9,166,525		15.92		4.1	19
Available for grant at December 31	6,510,610

In addition, the aggregate intrinsic value of options exercised in 2011 and 2010 was $10 million and $1 million, respectively.

Significant option groups outstanding at December 31, 2012 and related weighted average exercise price and remaining contractual term information follows:



Grant Date	Options Outstanding	Options Exercisable	Exercise Price			Remaining Contractual Term(Years)
2/27/2012	1,734,582	4,156	$	12.94		9.2
2/22/2011	1,311,165	343,417	13.91			8.2
2/23/2010	1,250,773	665,443	12.74			7.2
2/26/2009	1,631,988	1,230,591	4.81			6.2
2/21/2008	1,109,994	1,109,994	26.74			5.2
2/27/2007	1,239,522	1,239,522	24.71			4.2
12/6/2005	825,642	825,642	17.15			2.9
12/9/2004	1,465,881	1,465,881	12.54			1.9
12/2/2003	682,576	682,576	6.81			0.9
All other	2,276,739	1,599,303	(1		)	(1	)
	13,528,862	9,166,525

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(1)	Options in the “All other” category had exercise prices ranging from $5.52 to $36.25. The weighted average exercise price for options outstanding and exercisable in that category was $16.52 and $18.27, respectively, while the remaining weighted average contractual term was 5.0 and 3.5 years, respectively.

Weighted average grant date fair values of stock options and the assumptions used in estimating those fair values are as follows:



	2012			2011			2010
Weighted average grant date fair value	$	6.33		$	6.94		$	6.45
Black-Scholes model assumptions (1):
Expected term (years)	6.25			6.25			6.25
Interest rate	1.09		%	2.28		%	2.58		%
Volatility	50.8		%	49.5		%	50.5		%
Dividend yield	—			—			—

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(1)	We review the assumptions used in our Black-Scholes model in conjunction with estimating the grant date fair value of the annual grants of stock-based awards by our Board of Directors.

Performance Share Units

Performance share units granted under the 2008 Performance Plan are earned over a three-year period beginning January 1 of the year of grant. Total units earned for grants made in 2012, may vary between 0% and 200% of the units granted based on the attainment of performance targets during the related three-year period and continued service. Total units earned for grants made in 2011 and 2010, may vary between 0% and 150% of the units granted based on the attainment of performance targets during the related three-year period and continued service. The performance targets are established by the Board of Directors. All of the units earned will be settled through the issuance of an equivalent number of shares of our common stock and are equity classified.

Eligible employees may elect to defer receiving the payout of all or a portion of their units earned until termination of employment. For grants made in 2010 and later under the 2008 Performance Plan, each deferred unit equates to one share of our common stock and is payable 100% in shares of our common stock at the expiration of the deferral period.

The following table summarizes the activity related to performance share units during 2012:



	Units		Weighted Average Grant Date Fair Value
Unvested at January 1	295,460		$	14.13
Units granted	174,877		13.57
Units vested	(132,845	)	12.55
Units forfeited	(18,563	)	14.14
Unvested at December 31	318,929		14.48

We measure the fair value of grants of performance share units based primarily on the closing market price of a share of our common stock on the date of the grant, modified as appropriate to take into account the features of such grants.

Other Information

Stock-based compensation expense, cash payments made to settle SARs and performance share units, and cash received from the exercise of stock options follows:



(In millions)	2012		2011		2010
Stock-based compensation expense recognized	$	15	$	18	$	26
Tax impact	—		—		—
After-tax stock-based compensation expense	$	15	$	18	$	26
Cash payments to settle SARs and performance share units	$	—	$	—	$	—
Cash received from stock option exercises	4		8		1

As of December 31, 2012, unearned compensation cost related to the unvested portion of all stock-based awards was approximately $25 million and is expected to be recognized over the remaining vesting period of the respective grants, through December 31, 2016.