Stock-Based Compensation

The Company’s stock-based compensation includes stock options, restricted stock units (“RSUs”) and grants of contingent shares that are earned based on achieving targeted levels of total shareholder return. All current grants of stock options, RSUs and contingent shares are made under the PPG Industries, Inc. Amended and Restated Omnibus Incentive Plan (“PPG Amended Omnibus Plan”), which was amended and restated effective April 21, 2011. Shares available for future grants under the PPG Amended Omnibus Plan were 6.0 million as of December 31, 2014.

Total stock-based compensation cost was $73 million, $81 million and $71 million in 2014, 2013 and 2012, respectively. Stock-based compensation expense was lower in 2014 in comparison to 2013 due to decreases in time-based and performance-based RSU grants as well as a decrease in contingent shares. The total income tax benefit recognized in the accompanying consolidated statement of income related to the stock-based compensation was $25 million, $28 million and $25 million in 2014, 2013 and 2012, respectively.

Stock Options

PPG has outstanding stock option awards that have been granted under two stock option plans: the PPG Industries, Inc. Stock Plan (“PPG Stock Plan”) and the PPG Amended Omnibus Plan. Under the PPG Stock Plan and the PPG Amended Omnibus Plan, certain employees of the Company have been granted options to purchase shares of common stock at prices equal to the fair market value of the shares on the date the options were granted. The options are generally exercisable beginning from six to 48 months after being granted and have a maximum term of 10 years. Upon exercise of a stock option, shares of Company stock are issued from treasury stock. The PPG Stock Plan includes a restored option provision for options originally granted prior to January 1, 2003 that allows an optionee to exercise options and satisfy the option cost by certifying ownership of mature shares of PPG common stock with a market value equal to the option cost.

The fair value of stock options issued to employees is measured on the date of grant and is recognized as expense over the requisite service period. PPG estimates the fair value of stock options using the Black-Scholes option pricing model. The risk-free interest rate is determined by using the U.S. Treasury yield curve at the date of the grant and using a maturity equal to the expected life of the option. The expected life of options is calculated using the average of the vesting term and the maximum term, as prescribed by accounting guidance on the use of the simplified method for determining the expected term of an employee share option. The expected dividend yield and volatility are based on historical stock prices and dividend amounts over past time periods equal in length to the expected life of the options.

The following weighted average assumptions were used to calculate the fair values of stock option grants in each year:



	2014			2013		2012
Weighted average exercise price	$	187.21		$131.55		$90.30
Risk free interest rate	2.1		%	1.3	%	1.3	%
Expected life of option in years	6.5			6.5		6.5
Expected dividend yield	3.0		%	3.2	%	3.3	%
Expected volatility	30.1		%	29.9	%	29.4	%

The weighted average fair value of options granted was $43.09 per share, $27.36 per share and $17.97 per share for the years ended December 31, 2014, 2013, and 2012, respectively.

A summary of stock options outstanding and exercisable and activity for the year ended December 31, 2014 is presented below:



	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)	Intrinsic Value (in millions)
Outstanding, January 1, 2014	2,644,388		$	88.08	6.9	$	269
Granted	362,721		$	187.21
Exercised	(758,299	)	$	75.18
Forfeited/Expired	(27,629	)	$	140.54
Outstanding, December 31, 2014	2,221,181		$	108.01	6.8	$	273
Vested or expected to vest, December 31, 2014	2,171,513		$	107.71	6.8	$	268
Exercisable, December 31, 2014	641,592		$	66.79	4.0	$	105

At December 31, 2014, unrecognized compensation cost related to outstanding stock options that have not yet vested totaled $9 million. This cost is expected to be recognized as expense over a weighted average period of 2.0 years.

The following table presents stock option activity for the years ended December 31, 2014, 2013 and 2012:



($ in millions)	2014		2013		2012
Total intrinsic value of stock options exercised	$	92	$	110	$	110
Cash received from stock option exercises	57		68		122
Income tax benefit from the exercise of stock options	33		36		35
Total fair value of stock options vested	10		11		6

Restricted Stock Units ("RSUs")

Long-term incentive value is delivered to selected key management employees by granting RSUs, which have either time or performance-based vesting features. The fair value of an RSU is equal to the market value of a share of PPG stock on the date of grant. Time-based RSUs vest over the three-year period following the date of grant, unless forfeited, and will be paid out in the form of stock, cash or a combination of both at the Company’s discretion at the end of the three year vesting period. Performance-based RSUs vest based on achieving specific annual performance targets for earnings per share growth and cash flow return on capital over the three calendar year-end periods following the date of grant. Unless forfeited, the performance-based RSUs will be paid out in the form of stock, cash or a combination of both at the Company’s discretion at the end of the three-year performance period if PPG meets the performance targets. The amount paid for performance-based awards may range from 0% to 180% of the original grant, based upon the frequency with which the annual earnings per share growth and cash flow return on capital performance targets are met over the three calendar year periods comprising the vesting period. For the purposes of expense recognition, PPG has assumed that performance-based RSUs granted in 2012 will vest at the 180% level, those granted in 2013 will vest at the 150% level, and those granted in 2014 will vest at the 100% level. As of December 31, 2014, six of the six possible performance targets had been met for the 2012 grant, four of the four possible performance targets had been met for the 2013 grant, and two of two possible performance targets had been met for the 2014 grant.

The following table summarizes RSU activity for the year ended December 31, 2014:



	Number of Shares		Weighted Average Fair Value		Intrinsic Value (in millions)
Outstanding, January 1, 2014	860,657		$	90.15	$	163
Granted	131,761		$	180.69
Additional shares vested	115,372		$	105.35
Released from restrictions	(324,313	)	$	81.87
Forfeited	(28,015	)	$	103.83
Outstanding, December 31, 2014	755,462		$	113.16	$	173
Vested or expected to vest, December 31, 2014	746,957		$	113.03	$	172

There was $17 million of total unrecognized compensation cost related to unvested RSUs outstanding as of December 31, 2014. This cost is expected to be recognized as expense over a weighted average period of 1.7 years.

Contingent Share Grants

The Company also provides grants of contingent shares to selected key executives that may be earned based on PPG total shareholder return ("TSR") over the three-year period following the date of grant. Contingent share grants (referred to as “TSR awards”) are made annually and are paid out at the end of each three-year period based on the Company’s performance. Performance is measured by determining the percentile rank of the total shareholder return of PPG common stock in relation to the total shareholder return of the S&P 500 for the three-year period following the date of grant. This comparison group represents the entire S&P 500 Index as it existed at the beginning of the performance period. The payment of awards following the three-year award period will be based on performance achieved in accordance with the scale set forth in the plan agreement and may range from 0% to 220% of the initial grant. A payout of 100% is earned if the target performance is achieved. Contingent share awards for the 2011-2013, 2012-2014, and 2013-2015 periods earn dividend equivalents for the award period, which will be paid to participants with the award payout at the end of the period based on the actual number of contingent shares that are earned. Any payments made at the end of the award period may be in the form of stock, cash or a combination of both. The TSR awards qualify as liability awards, and compensation expense is recognized over the three-year award period based on the fair value of the awards (giving consideration to the Company’s percentile rank of total shareholder return) remeasured in each reporting period until settlement of the awards.

As of December 31, 2014, there was $13 million of total unrecognized compensation cost related to outstanding TSR awards based on the current estimate of fair value. This cost is expected to be recognized as expense over a weighted average period of 1.5 years.