Stock-Based Compensation Plans

Our stock-based compensation program is a broad-based program designed to attract and retain employees while also aligning employees’ interests with the interests of our shareholders. In addition, members of our Board of Directors participate in our stock-based compensation program in connection with their service on our board. Share-based awards issued to employees include non-qualified stock options, restricted stock awards and performance-based awards. Under the 2011 Omnibus Incentive Plan, the number of shares initially available for awards was 18 million. As of December 31, 2015, there were approximately 9 million shares of common stock available for future grants.

Total share-based compensation costs recognized for 2015, 2014 and 2013 were $15 million, $18 million, and $27 million, respectively. The unamortized compensation expense at December 31, 2015 related to our stock options, restricted shares and performance-based shares was $5 million, $19 million and $3 million, respectively, and is expected to be recognized over a weighted average period of 1.8, 1.9 and 1.9 years, respectively.

The amount of cash received from the exercise of stock options was $21 million for 2015 with a tax benefit of $8 million realized associated with stock option exercises and vesting of restricted stock. We classify as a financing activity the cash flows attributable to excess tax benefits arising from stock option exercises and restricted stock vestings.

Stock Option Grants

Options are awarded with a contractual term of ten years and generally vest over or at the conclusion of a three-year period and are exercisable in seven to ten-year periods, except in certain instances of death, retirement or disability. The exercise price per share is the fair market value of the underlying common stock on the date each option is granted. At December 31, 2015, there were options to purchase an aggregate of 2.6 million shares of common stock. The following is a summary of the changes in outstanding stock options for 2015:



(shares in thousands)	Shares		Weighted Average Exercise Price / Share		Weighted Average Remaining Contractual Term (Years)
Outstanding at January 1, 2015	2,989		$	28.60	6.5
Granted	708		$	35.88	9.2
Exercised	(840	)	$	24.86	4.5
Forfeited and expired	(296	)	$	34.76	8.6
Outstanding at December 31, 2015	2,561		$	31.16	6.8
Options exercisable at December 31, 2015	1,608		$	28.49	5.7
Vested and non-vested expected to vest as of December 31, 2015	2,480		$	31.00	6.7

The amount of non-vested options outstanding was 1.0 million, 1.0 million and 1.5 million at a weighted average grant date fair value of $35.65, $32.45 and $26.90 as of December 31, 2015, 2014 and 2013, respectively. The aggregate intrinsic value of the outstanding, exercisable, and vested and non-vested stock options expected to vest at December 31, 2015 was $15 million, $13 million and $15 million respectively. The total intrinsic value of options exercised (which is the amount by which the stock price exceeded the exercise price of the options on the date of exercise) during 2015, 2014 and 2013 was $9 million, $10 million and $7 million, respectively.

The fair value of each option grant was estimated on the date of grant using the binomial lattice pricing model which incorporates multiple and variable assumptions over time, including assumptions such as employee exercise patterns, stock price volatility and changes in dividends. The following are weighted-average assumptions used for 2015, 2014, and 2013:



	2015			2014			2013
Dividend yield	1.57		%	1.34		%	1.69		%
Volatility	27.77		%	28.49		%	31.10		%
Risk-free interest rate	1.64		%	1.82		%	1.28		%
Expected term (in years)	5.58			5.60			6.62
Weighted-average fair value per share	$	8.49		$	9.71		$	7.58

Expected volatility is calculated based on a weighted analysis of historic and implied volatility measures for a set of peer companies and Xylem. We use historical data to estimate option exercise and employee termination behavior within the valuation model. Employee groups and option characteristics are considered separately for valuation purposes. The expected term represents an estimate of the period of time options are expected to remain outstanding. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of option grant.

Restricted Stock Grants

Restricted shares granted to employees generally become fully vested upon the third anniversary of the date of grant. Prior to the time a restricted share becomes fully vested, the awardees cannot transfer, pledge, hypothecate or encumber such shares. Prior to the time a restricted share is fully vested, the awardees do not have certain rights of a stockholder, such as the right to vote and receive dividends; however, dividends accrue during the vesting period and are paid upon vesting. If an employee leaves prior to vesting, whether through resignation or termination for cause, the restricted stock and related accrued dividends are forfeited. If an employee retires, a pro rata portion of the restricted stock may vest in accordance with the terms of the grant agreements. Restricted shares granted to Board members become fully vested upon the day prior to the next annual meeting. Our restricted stock activity was as follows for 2015:



(shares in thousands)	Shares		Weighted Average Grant Date Fair Value / Share
Outstanding at January 1, 2015	1,171		$	31.80
Granted	426		$	35.87
Vested	(426	)	$	28.85
Forfeited	(158	)	$	32.75
Outstanding at December 31, 2015	1,013		$	34.52

Performance-Based Share Grants

As part of the annual grants under the long-term incentive plan, performance-based shares were granted to all executive officers of the Company. The performance-based shares vest based upon performance by the Company over a three-year period against targets approved by the compensation committee of the Company's Board of Directors prior to the grant date. For the performance periods, the performance-based shares were granted at a target of 100% with actual payout contingent upon the achievement of a pre-set, three-year adjusted Return on Invested Capital and cumulative adjusted net income performance target. The calculated compensation cost is adjusted based on an estimate of awards ultimately expected to vest and our assessment of the probable outcome of the performance condition. The fair value of performance-based share awards at 100% target is determined using the closing price of our common stock on date of grant. Our performance-based share activity was as follows for 2015:



(shares in thousands)	Shares		Weighted Average Grant Date Fair Value / Share
Outstanding at January 1, 2015	124		$	33.95
Granted	103		$	35.91
Forfeited	(67	)	$	33.21
Outstanding at December 31, 2015	160		$	35.48