Share-Based Compensation Plans and Other Incentive Plans

Stock Options, Stock Appreciation Rights and Employee Stock Purchase Plan

The Company grants options to acquire shares of common stock to certain employees and to existing option holders of acquired companies in connection with the merging of option plans following an acquisition. Each option granted and stock appreciation right has an exercise price of no less than 100% of the fair market value of the common stock on the date of the grant. The awards have a contractual life of five to fifteen years and vest over two to four years. Stock options and stock appreciation rights assumed or replaced with comparable stock options or stock appreciation rights in conjunction with a change in control of the Company only become exercisable if the holder is also involuntarily terminated (for a reason other than cause) or quits for good reason within 24 months of a change in control.

The employee stock purchase plan allows eligible participants to purchase shares of the Company’s common stock through payroll deductions of up to 20% of eligible compensation on an after-tax basis. Plan participants cannot purchase more than $25,000 of stock in any calendar year. The price an employee pays per share is 85% of the lower of the fair market value of the Company’s stock on the close of the first trading day or last trading day of the purchase period. The plan has two purchase periods, the first from October 1 through March 31 and the second from April 1 through September 30. For the years ended December 31, 2014, 2013 and 2012, employees purchased 1.4 million, 1.5 million and 1.4 million shares, respectively, at purchase prices of $51.76 and $53.79, $43.02 and $50.47, and $34.52 and $42.96, respectively.

The Company calculates the value of each employee stock option, estimated on the date of grant, using the Black-Scholes option pricing model. The weighted-average estimated fair value of employee stock options granted during 2014, 2013 and 2012 was $11.02, $9.52 and $9.60, respectively, using the following weighted-average assumptions:



	2014		2013		2012
Expected volatility	21.7	%	22.1	%	24.0	%
Risk-free interest rate	1.6	%	0.9	%	0.8	%
Dividend yield	2.5	%	2.4	%	2.2	%
Expected life (years)	5.2		5.9		6.1

The Company uses the implied volatility for traded options on the Company’s stock as the expected volatility assumption required in the Black-Scholes model. The selection of the implied volatility approach was based upon the availability of actively traded options on the Company’s stock and the Company’s assessment that implied volatility is more representative of future stock price trends than historical volatility.

The risk-free interest rate assumption is based upon the average daily closing rates during the year for U.S. Treasury notes that have a life which approximates the expected life of the option. The dividend yield assumption is based on the Company’s future expectation of dividend payouts. The expected life of employee stock options represents the average of the contractual term of the options and the weighted-average vesting period for all option tranches.

The Company has applied forfeiture rates, estimated based on historical data, of 10%-50% to the option fair values calculated by the Black-Scholes option pricing model. These estimated forfeiture rates are applied to grants based on their remaining vesting term and may be revised in subsequent periods if actual forfeitures differ from these estimates.

Stock option activity was as follows (in thousands, except exercise price and employee data):



	2014				2013				2012
Years ended December 31	Shares Subject to Options		Wtd. Avg. Exercise Price		Shares Subject to Options		Wtd. Avg. Exercise Price		Shares Subject to Options		Wtd. Avg. Exercise Price
Options outstanding at January 1	10,937		$	79	13,132		$	70	15,729		$	63
Options granted	1,340		66		1,652		57		1,286		51
Options exercised	(1,526	)	39		(2,950	)	31		(2,831	)	29
Options terminated, cancelled or expired	(1,067	)	65		(897	)	65		(1,052	)	60
Options outstanding at December 31	9,684		85		10,937		79		13,132		70
Options exercisable at December 31	7,282		94		7,628		91		9,242		81
Approx. number of employees granted options	118				123				115

At December 31, 2014, the Company had $21 million of total unrecognized compensation expense, net of estimated forfeitures, related to stock option plans and the employee stock purchase plan that will be recognized over the weighted average period of approximately two years. Cash received from stock option exercises and the employee stock purchase plan was $135 million, $165 million and $133 million for the years ended December 31, 2014, 2013 and 2012, respectively. The total intrinsic value of options exercised during the years ended December 31, 2014, 2013 and 2012 was $38 million, $85 million and $59 million, respectively. The aggregate intrinsic value for options outstanding and exercisable as of December 31, 2014 was $119 million and $103 million, respectively, based on a December 31, 2014 stock price of $67.08 per share.

The following table summarizes information about stock options outstanding and exercisable at December 31, 2014 (in thousands, except exercise price and years):



	Options Outstanding				Options Exercisable
Exercise price range	No. of options	Wtd. avg. Exercise Price		Wtd. avg. contractual life (in yrs.)	No. of options	Wtd. avg. Exercise Price
Under $30	699	$	27	5	699	$	27
$30-$40	2,222	39		5	2,222	39
$41-$50	231	45		6	222	45
$51-$60	1,786	54		8	584	54
$61-$70	1,430	66		8	239	65
$71-$80	197	74		2	197	74
$81 and over	3,119	161		0	3,119	161
	9,684				7,282

As of December 31, 2014 and 2013, the weighted average contractual life for options outstanding and exercisable was five and four years, respectively.

Restricted Stock and Restricted Stock Units

Restricted stock (“RS”) and restricted stock unit (“RSU”) grants consist of shares or the rights to shares of the Company’s common stock which are awarded to employees and non-employee directors. The grants are restricted such that they are subject to substantial risk of forfeiture and to restrictions on their sale or other transfer by the employee. Shares of RS and RSUs assumed or replaced with comparable shares of RS or RSUs in conjunction with a change in control will only have the restrictions lapse if the holder is also involuntarily terminated (for a reason other than cause) or quits for good reason within 24 months of a change in control.

Restricted stock and restricted stock unit activity was as follows (in thousands, except fair value and employee data):



	2014				2013				2012
Years ended December 31	RS and RSU		Wtd. Avg. Grant Date Fair Value		RS and RSU		Wtd Avg. Grant Date Fair Value		RS and RSU		Wtd Avg. Grant Date Fair Value
RS and RSU outstanding at January 1	3,728		$	49	6,299		$	41	8,990		$	40
Granted	1,235		63		1,558		54		1,657		49
Vested	(2,445	)	48		(3,610	)	38		(3,845	)	41
Terminated, canceled or expired	(765	)	54		(519	)	45		(503	)	33
RS and RSU outstanding at December 31	1,753		58		3,728		49		6,299		41
Approx. number of employees granted RS and RSUs	1,979				2,295				2,355

At December 31, 2014, the Company had unrecognized compensation expense related to RS and RSUs of $65 million net of estimated forfeitures, expected to be recognized over the weighted average period of approximately two years. The total fair value of RS and RSU shares vested during the years ended December 31, 2014, 2013 and 2012 was $160 million, $138 million and $144 million, respectively. The aggregate fair value of outstanding RS and RSUs as of December 31, 2014 was $110 million.

Total Share-Based Compensation Expense

Compensation expense for the Company’s employee stock options, stock appreciation rights, employee stock purchase plans, RS and RSUs was as follows:



Years ended December 31	2014			2013			2012
Share-based compensation expense included in:
Costs of sales	$	10		$	16		$	20
Selling, general and administrative expenses	61			73			88
Research and development expenditures	23			31			38
Share-based compensation expense included in Operating earnings	94			120			146
Tax benefit	30			37			49
Share-based compensation expense, net of tax	$	64		$	83		$	97
Decrease in basic earnings per share	$	(0.28	)	$	(0.31	)	$	(0.33	)
Decrease in diluted earnings per share	$	(0.28	)	$	(0.31	)	$	(0.33	)
Share-based compensation expense in discontinued operations	$	20		$	33		$	38

At December 31, 2014 and 2013, 19.7 million and 20.4 million shares, respectively, were available for future share-based award grants under the current share-based compensation plan, covering all equity awards to employees and non-employee directors.

Motorola Solutions Incentive Plans

The Company's incentive plans provide eligible employees with an annual payment, calculated as a percentage of an employee’s eligible earnings, in the year after the close of the current calendar year if specified business goals and individual performance targets are met. The expense for awards under these incentive plans for the years ended December 31, 2014, 2013 and 2012 was $53 million, $87 million and $145 million, respectively.

Long-Range Incentive Plan

The Long-Range Incentive Plan (“LRIP”) rewards participating elected officers for the Company’s achievement of specified business goals during the period, based on a single performance objective measured over a three year period. The expense for LRIP for the years ended December 31, 2014, 2013 and 2012 was $3 million, $4 million and $9 million, respectively.