Share-Based Compensation and Other Compensation Arrangements

Share-Based Compensation

Our 2003 Incentive Stock Plan, as amended and restated, permits awards of incentive and non-qualified stock options, stock appreciation rights, restricted stock or units, performance shares, performance restricted stock or units, performance units and other stock and cash-based awards to our employees, officers, directors, consultants, and independent contractors. The aggregate number of shares of our stock authorized for issuance under the plan is 87,000,000.

Shares issued as a result of stock option exercises or conversion of stock unit awards will be funded out of treasury shares, except to the extent there are insufficient treasury shares, in which case new shares will be issued. We believe we currently have adequate treasury shares to satisfy these issuances during 2015.

Share-based plans expense is primarily included in General and administrative expense since it is incentive compensation issued primarily to our executives. The share-based plans expense and related income tax benefit were as follows:



Years ended December 31,	2014		2013		2012
Stock options		$62		$93		$85
Restricted stock units and other awards	133		113		108
Share-based plans expense		$195		$206		$193
Income tax benefit		$70		$76		$75

Stock Options

In February 2013 and 2012, we granted to our executives 6,591,968 and 6,114,922 options, respectively. The options have been granted with an exercise price equal to the fair market value of our stock on the date of grant and expire ten years after the date of grant. The stock options vest over a period of three years, with 34% vesting after the first year, 33% vesting after the second year and the remaining 33% vesting after the third year. If an executive terminates employment for any reason, the non-vested portion of the stock option will not vest and all rights to the non-vested portion will terminate. We discontinued granting options in 2014, replacing them with performance-based restricted stock units.

Stock option activity for the year ended December 31, 2014 is as follows:



	Shares	Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value
Number of shares under option:
Outstanding at beginning of year	23,767,743		$73.97
Granted	20,008	124.98
Exercised	(4,584,615)	74.82
Forfeited	(697,891)	75.70
Expired	(600)	50.57
Outstanding at end of year	18,504,645		$73.75	5.93		$1,041
Exercisable at end of year	13,215,966		$72.74	5.10		$757

The total intrinsic value of options exercised during the years ended December 31, 2014, 2013 and 2012 was $250, $546 and $89, respectively. Cash received from options exercised during the years ended December 31, 2014, 2013 and 2012 was $343, $1,097 and $120 with a related tax benefit of $87, $190 and $29, respectively, derived from the compensation deductions resulting from these option exercises. At December 31, 2014, there was $34 of total unrecognized compensation cost related to our stock option plan which is expected to be recognized over a weighted average period of one year. The grant date fair value of stock options vested during the years ended December 31, 2014, 2013 and 2012 was $87, $89 and $83, respectively.

The fair values of options were estimated using the Black-Scholes option-pricing model with the following assumptions:



Grant Year	Grant Date	Expected Life	Expected Volatility		Expected Dividend Yield		Risk Free Interest Rate		Weighted-Average Grant Date Fair Value Per Share
2013	2/25/2013	6 years	29.0	%	2.6	%	1.0	%		$15.85
2012	2/27/2012	6 years	29.9	%	2.4	%	1.1	%		$16.89

The expected volatility of the stock options is based on a combination of our historical stock volatility and the volatility levels implied on the grant date by actively traded option contracts on our common stock. We determined the expected term of the stock option grants to be six years, calculated using the “simplified” method in accordance with the SEC Staff Accounting Bulletin 110. We use the “simplified” method since we changed the vesting terms, tax treatment and the recipients of our stock options beginning in 2006 such that we believe our historical data prior to 2006 does not provide a reasonable basis upon which to estimate expected term and we do not have enough option exercise data from our grants issued subsequent to 2006 to support our own estimate as a result of vesting terms and changes in the stock price.

Restricted Stock Units

In February 2014, 2013 and 2012, we granted to our executives 695,651, 1,375,414 and 1,369,810 restricted stock units (RSUs) as part of our long-term incentive program with grant date fair values of $129.58, $75.97 and $75.40 per unit, respectively. The RSUs granted under this program will vest and settle in common stock (on a one-for-one basis) on the third anniversary of the grant date. If an executive terminates employment because of retirement, involuntary layoff, disability, or death, the employee (or beneficiary) will receive a proration of stock units based on active employment during the three-year service period. In all other cases, the RSUs will not vest and all rights to the stock units will terminate. In addition to RSUs awarded under our long-term incentive program, we grant RSUs to certain executives and employees to encourage retention or to reward various achievements. These RSUs are labeled other RSUs in the table below. The fair values of all RSUs are estimated using the average of the high and low stock prices on the date of grant.

RSU activity for the year ended December 31, 2014 was as follows:



	Long-Term Incentive Program			Other
Number of units:
Outstanding at beginning of year	3,722,317			1,132,930
Granted	729,603			288,600
Dividends	72,387			25,833
Forfeited	(177,986		)	(13,962		)
Distributed	(1,313,782		)	(286,303		)
Outstanding at end of year	3,032,539			1,147,098
Unrecognized compensation cost		$94			$41
Weighted average remaining contractual life (years)	1.7			2.3

The number of vested but undistributed RSUs at December 31, 2014 was not significant.

Performance-Based Restricted Stock Units

Performance-Based Restricted Stock Units (PBRSUs) are stock units that pay out based on the Company’s total shareholder return as compared to a group of peer companies over a three-year period. The award payout can range from 0% to 200% of the initial PBRSU grant, but will not exceed 400% of the initial value (excluding dividend equivalent credits). The PBRSUs granted under this program will vest at the payout amount and settle in common stock (on a one-for-one basis) on the third anniversary of the grant date. If an executive terminates employment because of retirement, involuntary layoff, disability, or death, the employee (or beneficiary) remains eligible under the award and, if the award is earned, will receive a proration of stock units based on active employment during the three-year service period. In all other cases, the PBRSUs will not vest and all rights to the stock units will terminate.

In February 2014, we granted to our executives 662,215 initial PBRSUs as part of our long-term incentive program with a grant date fair value of $136.12 per unit. Compensation expense for the award is recognized over the three-year performance period based upon the grant date fair value estimated using a Monte-Carlo simulation model. The model used the following assumptions: expected volatility of 24.2% based upon our historical stock volatility, a risk-free interest rate of 0.72%, and no expected dividend yield because the units earn dividend equivalents.

PBRSU activity for the year ended December 31, 2014 was as follows:



	Long-Term Incentive Program
Number of units:
Outstanding at beginning of year
Granted	662,215
Dividends	10,497
Forfeited	(49,610		)
Distributed	0
Outstanding at end of year	623,102
Unrecognized compensation cost		$53
Weighted average remaining contractual life (years)	2.1

Other Compensation Arrangements

Performance Awards

Performance Awards are cash units that pay out based on the achievement of long-term financial goals at the end of a three-year period. Each unit has an initial value of $100 dollars. The amount payable at the end of the three-year performance period may be anywhere from $0 to $200 dollars per unit, depending on the Company’s performance against plan for a three-year period. The Compensation Committee has the discretion to pay these awards in cash, stock, or a combination of both after the three-year performance period. Compensation expense, based on the estimated performance payout, is recognized ratably over the performance period.

During 2014, 2013 and 2012, we granted Performance Awards to our executives with the payout based on the achievement of financial goals for each three-year period following the grant date. The minimum payout amount is $0 and the maximum amount we could be required to pay out for the 2014, 2013 and 2012 Performance Awards is $343, $261 and $251, respectively. The 2012 grant is expected to be paid out in cash in March 2015.

Deferred Compensation

The Company has a deferred compensation plan which permits executives to defer receipt of a portion of their salary, bonus, and certain other incentive awards. Participants can diversify deferred compensation among 23 investment funds including a Boeing stock unit account.

Total expense related to deferred compensation was $44, $238 and $75 in 2014, 2013 and 2012, respectively. As of December 31, 2014 and 2013, the deferred compensation liability which is being marked to market was $1,234 and $1,258.