16. Stock-Based Compensation

Employee Stock Purchase Plan

We have an Employee Stock Purchase Plan (“ESPP”) under which employees that have been employed for at least 30 days may purchase shares of our common stock at a discount. The plan provides for two offering periods for purchases: January through June and July through December. At the end of each offering period, employees are able to purchase shares of our common stock at a price equal to 85% of the lesser of the market value of the stock on the first and last day of such offering period. The purchases are made at the end of an offering period with funds accumulated through payroll deductions over the course of the offering period, and the number of shares that may be purchased is limited by IRS regulations. The total number of shares issued under the plan for the offering periods in each of 2014, 2013 and 2012 was approximately 774,000, 928,000 and 1 million, respectively. Including the impact of the January 2015 issuance of shares associated with the July to December 2014 offering period, approximately 1.0 million shares remain available for issuance under the plan.

Accounting for our ESPP increased annual compensation expense by approximately by $6 million, or $4 million net of tax, for both 2014 and 2013 and by $7 million, or $4 million net of tax, for 2012.

Employee Stock Incentive Plans

In May 2014, our stockholders approved our 2014 Stock Incentive Plan (the “2014 Plan”) to replace our 2009 Stock Incentive Plan (the “2009 Plan”). The 2014 Plan authorized 23.8 million shares of our common stock for issuance pursuant to the 2014 Plan, plus the approximately 1.1 million shares that then remained available for issuance under the 2009 Plan, and any shares subject to outstanding awards under the 2009 Plan that are subsequently cancelled, forfeited, terminate, expire or lapse. As of December 31, 2014, approximately 25.9 million shares were available for future grants under the 2014 Plan. All of our stock-based compensation awards described herein have been made pursuant to either our 2009 Plan or our 2014 Plan, collectively referred to as the “Incentive Plans.” We currently utilize treasury shares to meet the needs of our equity-based compensation programs.

Pursuant to the Incentive Plans, we have the ability to issue stock options, stock appreciation rights and stock awards, including restricted stock, restricted stock units, or RSUs, and performance share units, or PSUs. The terms and conditions of equity awards granted under the Incentive Plans are determined by the Management Development and Compensation Committee of our Board of Directors.

The 2014 annual Incentive Plan awards granted to the Company’s senior leadership team, which generally includes the Company’s executive officers, included a combination of PSUs and stock options. The annual Incentive Plan awards granted to certain key employees included a combination of PSUs, RSUs and stock options in 2014. The Company has also periodically granted RSUs and stock options to employees working on key initiatives, in connection with new hires and promotions and to field-based managers.

Restricted Stock Units — A summary of our RSUs is presented in the table below (units in thousands):


	Units			Weighted Average Fair Value
Unvested at January 1, 2014		535		$	35.68
Granted		219		$	41.41
Vested		(57	)	$	39.58
Forfeited		(77	)	$	38.41

Unvested at December 31, 2014		620		$	37.44

The total fair market value of RSUs that vested during the years ended December 31, 2014, 2013 and 2012 was $3 million, $1 million and $11 million, respectively. Net of units deferred and units used for payment of associated taxes, we issued approximately 42,000 shares of common stock for RSUs that vested during the year ended December 31, 2014.

RSUs may not be voted or sold by award recipients until time-based vesting restrictions have lapsed. RSUs primarily provide for three-year cliff vesting and include divided equivalents accumulated during the vesting period. Unvested units are subject to forfeiture in the event of voluntary or for-cause termination. RSUs are subject to pro-rata vesting upon an employee’s retirement or involuntary termination other than for cause and become immediately vested in the event of an employee’s death or disability.

Compensation expense associated with RSUs is measured based on the grant-date fair value of our common stock and is recognized on a straight-line basis over the required employment period, which is generally the vesting period. Compensation expense is only recognized for those awards that we expect to vest, which we estimate based upon an assessment of expected forfeitures.

Performance Share Units — Three types of PSUs are currently outstanding: (i) PSUs for which payout is dependent on total shareholder return relative to the S&P 500 (“TSR PSUs”); (ii) PSUs for which payout is dependent on the Company’s performance against pre-established return on invested capital metrics (“ROIC PSUs”) and (iii) PSUs for which payout is dependent on the Company’s performance against pre-established adjusted cash flow metrics (“Cash Flow PSUs”). All types of PSUs are payable in shares of common stock after the end of a three-year performance period, when the Company’s financial performance for the entire performance period is reported, typically in mid- to late-February of the succeeding year. At the end of the performance period, the number of shares awarded can range from 0% to 200% of the targeted amount, depending on the performance against the pre-established targets. A summary of our PSUs is presented in the table below (units in thousands):


	Units			Weighted Average Fair Value
Unvested at January 1, 2014		1,826		$	43.41
Granted		695		$	45.83
Vested		(317	)	$	42.42
Forfeited		(171	)	$	46.20

Unvested at December 31, 2014		2,033		$	46.28

The determination of achievement of performance results and corresponding vesting of PSUs for the three-year performance period ended December 31, 2014 was performed by the Management Development and Compensation Committee in February 2015. Accordingly, vesting information for such awards is not included in the table above as of December 31, 2014. The “vested” PSUs are for the three-year performance period ended December 31, 2013, as achievement of performance results and corresponding vesting was determined in February 2014. The Company’s financial results, as measured for purposes of these awards, were lower than the target levels established but in excess of the threshold performance criteria. Accordingly, recipients of these PSU awards were entitled to receive a payout of approximately 60% of the vested PSUs. In early 2014, we issued approximately 106,000 shares of common stock for these vested PSUs, net of units deferred and units used for payment of associated taxes.

The shares of common stock that were earned during the years ended December 31, 2014, 2013 and 2012 on account of PSU awards had a fair market value of $8 million, $14 million and $32 million, respectively. PSUs have no voting rights. PSUs receive dividend equivalents that are paid out in cash based on actual performance at the end of the awards’ performance period. PSUs are payable to an employee (or his beneficiary) upon death or disability as if that employee had remained employed until the end of the performance period, are subject to pro-rata vesting upon an employee’s retirement or involuntary termination other than for cause and are subject to forfeiture in the event of voluntary or for-cause termination.

Compensation expense associated with our ROIC PSUs and Cash Flow PSUs that continue to vest based on future performance is measured based on the fair value of our common stock at the end of each reporting period until the performance period ends. Compensation expense is recognized ratably over the performance period based on our estimated achievement of the established performance criteria. Compensation expense is only recognized for those awards that we expect to vest, which we estimate based upon an assessment of both the probability that the performance criteria will be achieved and expected forfeitures.

The grant-date fair value of our TSR PSUs is based on a Monte Carlo valuation and compensation expense is recognized on a straight-line basis over the vesting period. Compensation expense is recognized for all TSR PSUs whether or not the market conditions are achieved less expected forfeitures.

Deferred Units — Recipients can elect to defer some or all of the vested RSU or PSU awards until a specified date or dates they choose. Deferred amounts are not invested, nor do they earn interest, but deferred amounts do earn dividend equivalents during deferral. Deferred amounts are paid out in shares of common stock at the end of the deferral period. At December 31, 2014, we had approximately 295,000 vested deferred units outstanding.

Stock Options — Stock options granted primarily vest in 25% increments on the first two anniversaries of the date of grant with the remaining 50% vesting on the third anniversary. The exercise price of the options is the average of the high and low market value of our common stock on the date of grant, and the options have a term of 10 years. A summary of our stock options is presented in the table below (options in thousands):


	Options			Weighted Average Exercise Price
Outstanding at January 1, 2014		9,674		$	35.98
Granted		2,099		$	41.23
Exercised		(2,798	)	$	35.85
Forfeited or expired		(597	)	$	37.60

Outstanding at December 31, 2014(a)		8,378		$	37.22

Exercisable at December 31, 2014(b)		4,451		$	36.05

(a)	Stock options outstanding as of December 31, 2014 have a weighted average remaining contractual term of 7.2 years and an aggregate intrinsic value of $118 million based on the market value of our common stock on December 31, 2014.

(b)

Stock options exercisable as of December 31, 2014 have a weighted average remaining contractual term of 6.2 years and an aggregate intrinsic value of $68 million based on the market value of our common stock on December 31, 2014. Stock options exercisable at December 31, 2014 have an exercise price ranging from $32.18 to $40.62.

We received cash proceeds of $93 million, $132 million and $43 million during the years ended December 31, 2014, 2013 and 2012, respectively, from employee stock option exercises. We also realized tax benefits from these stock option exercises during the years ended December 31, 2014, 2013 and 2012 of $5 million, $10 million and $5 million, respectively. These amounts have been presented as cash inflows in the “Cash flows from financing activities” section of our Consolidated Statements of Cash Flows. The aggregate intrinsic value of stock options exercised during the years ended December 31, 2014, 2013 and 2012 was $27 million, $41 million and $15 million, respectively.

All unvested stock options shall become exercisable upon the award recipient’s death or disability. In the event of a recipient’s retirement, stock options shall continue to vest pursuant to the original schedule set forth in the award agreement. If the recipient is terminated by the Company without cause or voluntarily resigns, the recipient shall be entitled to exercise all stock options outstanding and exercisable within a specified time frame after such termination. All outstanding stock options, whether exercisable or not, are forfeited upon termination for cause.

We account for our employee stock options under the fair value method of accounting using a Black-Scholes methodology to measure stock option expense at the date of grant. The weighted average grant-date fair value of stock options granted during the years ended December 31, 2014, 2013 and 2012 was $4.55, $4.26 and $4.66, respectively. The fair value of the stock options at the date of grant is amortized to expense over the vesting period less expected forfeitures, except for stock options granted to retirement-eligible employees, for which expense is accelerated over the period that the recipient becomes retirement-eligible. The following table presents the weighted average assumptions used to value employee stock options granted during the years ended December 31 under the Black-Scholes valuation model:


	2014	2013	2012
Expected option life	4.8 years	5.4 years	5.5 years
Expected volatility	18.4%	21.8%	24.2%
Expected dividend yield	3.6%	4.0%	4.1%
Risk-free interest rate	1.6%	1.0%	1.1%

The Company bases its expected option life on the expected exercise and termination behavior of its optionees and an appropriate model of the Company’s future stock price. The expected volatility assumption is derived from the historical volatility of the Company’s common stock over the most recent period commensurate with the estimated expected life of the Company’s stock options, combined with other relevant factors including implied volatility in market-traded options on the Company’s stock. The dividend yield is the annual rate of dividends per share over the exercise price of the option as of the grant date.

For the years ended December 31, 2014, 2013 and 2012 we recognized $59 million, $54 million and $22 million, respectively, of compensation expense associated with RSU, PSU and stock option awards as a component of “Selling, general and administrative” expenses in our Consolidated Statement of Operations. Our “Provision for income taxes” for the years ended December 31, 2014, 2013 and 2012 includes related deferred income tax benefits of $23 million, $21 million and $9 million, respectively. We have not capitalized any equity-based compensation costs during the years ended December 31, 2014, 2013 and 2012.

Compensation expense recognized in 2014 increased when compared to 2013, in part due to the increase in expected payout of our PSUs. Compensation expense recognized in 2013 increased when compared to 2012, in part due to the payout of PSUs granted in 2010, which was approved in 2013. Expense associated with these awards had been reversed in 2012 when it no longer appeared probable that threshold performance would be achieved. As of December 31, 2014 we estimate that a total of approximately $46 million of currently unrecognized compensation expense will be recognized over a weighted average period of 1.4 years for unvested RSU, PSU and stock option awards issued and outstanding.

Non-Employee Director Plan

Our non-employee directors currently receive annual grants of shares of our common stock, generally payable in two equal installments, under the Incentive Plans described above.