Note 10. Share-Based Compensation

Our 2007 Long-Term Incentive Plan (Plan) authorizes awards to our key employees in the form of options to purchase our shares, restricted stock, restricted stock units, stock appreciation rights, performance stock awards and other awards. A maximum of 12 million shares is authorized for issuance for all purposes under the Plan plus any shares that become available upon cancellation, forfeiture or expiration of awards granted under the 1999 Long-Term Incentive Plan. No more than 12 million shares may be awarded pursuant to incentive stock options, and no more than 3 million shares may be awarded pursuant to restricted stock units or other awards intended to be paid in shares. The Plan also authorizes performance share units to be paid in cash based upon the value of our common stock.

Through our Deferred Income Plan for Textron Executives (DIP), we provide certain executives the opportunity to voluntarily defer up to 25% of their base salary and up to 80% of annual, long-term incentive and other compensation. Elective deferrals may be put into either a stock unit account or an interest-bearing account. Executives who are eligible to participate in the DIP and have not achieved and/or maintained the required minimum stock ownership level are required to defer part of each subsequent long-term incentive compensation cash payout into the DIP stock unit account until the ownership requirements are satisfied. Participants cannot move amounts between the two accounts while actively employed by us and cannot receive distributions until termination of employment. The intrinsic value of amounts paid under the DIP totaled $1 million in each of the three years ended December 28, 2013.

Share-based compensation costs are reflected primarily in selling and administrative expenses. The compensation expense that has been recorded in net income for our share-based compensation plans is as follows:

(In millions)	2013				2012				2011
Compensation expense		$	86			$	71			$	50
Income tax benefit		(32		)		(26		)		(18		)
Total net compensation cost included in net income		$	54			$	45			$	32

Compensation expense included approximately $26 million, $23 million and $17 million in 2013, 2012 and 2011, respectively, for a portion of the fair value of options issued and the portion of previously granted options for which the requisite service has been rendered.

Compensation cost for awards subject only to service conditions that vest ratably are recognized on a straight-line basis over the requisite service period for each separately vesting portion of the award. As of December 28, 2013, we had not recognized $61 million of total compensation costs associated with unvested awards subject only to service conditions. We expect to recognize compensation expense for these awards over a weighted-average period of approximately two years.

Stock Options

Options to purchase our shares have a maximum term of ten years and generally vest ratably over a three-year period. The stock option compensation cost calculated under the fair value approach is recognized over the vesting period of the stock options. We estimate the fair value of options granted on the date of grant using the Black-Scholes option-pricing model. Expected volatilities are based on implied volatilities from traded options on our common stock, historical volatilities and other factors. The expected term is based on historical option exercise data, which is adjusted to reflect any anticipated changes in expected behavior.

The weighted-average fair value of options granted during the past three years and the assumptions used in our option-pricing model for such grants are as follows:

	2013		2012		2011
Fair value of options at grant date	$	9.69	$	10.19	$	9.84
Dividend yield	0.3%		0.3%		0.3%
Expected volatility	37.0%		40.0%		38.0%
Risk-free interest rate	0.9%		0.9%		2.4%
Expected term (in years)	5.5		5.5		5.5

The stock option activity under the Plan in 2013 is provided below:

(Options in thousands)	Number of Options		Weighted- Average Exercise Price
Outstanding at beginning of year	9,484			$	27.98
Granted	2,169			28.47
Exercised	(1,408	)		(23.38		)
Canceled, expired or forfeited	(1,227	)		(37.13		)
Outstanding at end of year	9,018			$	27.57
Exercisable at end of year	4,362			$	27.23

At December 28, 2013, our outstanding options had an aggregate intrinsic value of $88 million and a weighted-average remaining contractual life of six years. Our exercisable options had an aggregate intrinsic value of $47 million and a weighted-average remaining contractual life of five years at December 28, 2013. The total intrinsic value of options exercised during 2013, 2012 and 2011 amounted to $10 million, $11 million and $2 million, respectively.

Restricted Stock Units

In 2013 and 2012, we issued restricted stock units settled in both cash and stock (vesting one-third each in the third, fourth and fifth year following the year of the grant), which included the right to receive dividend equivalents. The fair value of these units is based solely on the trading price of our common stock on the grant date and is recognized ratably over the vesting period. During 2009 through 2011, we issued restricted stock units settled in cash that vested in equal installments over five years. In 2008, restricted stock unit awards generally were payable in shares of common stock (vesting one-third each in the third, fourth and fifth year following the year of the grant). The 2013 activity for restricted stock units is provided below:

	Units Payable in Stock						Units Payable in Cash
(Shares/Units in thousands)	Number of Shares		Weighted- Average Grant Date Fair Value				Number of Units		Weighted- Average Grant Date Fair Value
Outstanding at beginning of year, nonvested	710			$	29.94		2,540			$	20.79
Granted	257			28.47			596			28.43
Vested	(146	)		(40.36		)	(720	)		(17.19		)
Forfeited	(41	)		(27.87		)	(391	)		(23.85		)
Outstanding at end of year, nonvested	780			$	27.56		2,025			$	23.73

The fair value of the restricted stock awards that vested and/or amounts paid under these awards during the respective periods is as follows:

(In millions)	2013			2012			2011
Fair value of awards vested		$	26		$	35		$	41
Cash paid		23			25			23

Performance Share Units

The fair value of share-based compensation awards accounted for as liabilities includes performance share units, which are paid in cash in the first quarter of the year following vesting. Payouts under performance share units vary based on certain performance criteria generally set for each year of a three-year performance period. The performance share units vest at the end of three years. The fair value of these awards is based on the trading price of our common stock and is remeasured at each reporting period date.

The 2013 activity for our performance share units is as follows:

(Units in thousands)	Number of Units		Weighted- Average Grant Date Fair Value
Outstanding at beginning of year, nonvested	875			$	27.14
Granted	421			28.47
Vested	(344	)		(26.25		)
Forfeited	(57	)		(27.44		)
Outstanding at end of year, nonvested	895			$	28.08

The fair value of the performance share units that vested and/or amounts paid under these awards during the respective periods is as follows:

(In millions)	2013		2012		2011
Fair value of awards vested	$	13	$	10	$	33
Cash paid	11		52		1