Note 10. Share-Based Compensation

Our 2015 Long-Term Incentive Plan (Plan), which replaced our 2007 Long-Term Incentive Plan in April 2015, authorizes awards to selected employees in the form of stock options, restricted stock, restricted stock units, stock appreciation rights, performance stock, performance share units and other awards. A maximum of 17 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 2007 Long-Term Incentive Plan. No more than 17 million shares may be awarded pursuant to incentive stock options, and no more than 4.25 million shares may be issued pursuant to awards of restricted stock, restricted stock units, performance stock or other awards that are payable in shares.

Through our Deferred Income Plan for Textron Executives, we provide certain executives the opportunity to voluntarily defer up to 80% of their base salary, along with incentive compensation. Elective deferrals may be put into either a stock unit account or an interest-bearing account. 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 this deferred income plan was not significant in 2016, 2015 and 2014.

Share-based compensation costs are reflected primarily in selling and administrative expense. Compensation expense included in net income for our share-based compensation plans is as follows:

(In millions)		2016		2015		2014
Compensation expense	$	71	$	63	$	85
Income tax benefit		(26)		(23)		(32)

Total net compensation expense included in net income	$	45	$	40	$	53

Compensation expense included approximately $20 million in 2016 and $21 million in both 2015 and 2014, respectively, for a portion of the fair value of stock 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 31, 2016, we had not recognized $43 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:

		2016		2015		2014
Fair value of options at grant date	$	10.33	$	14.03	$	12.72
Dividend yield		0.2%		0.2%		0.2%
Expected volatility		33.6%		34.9%		34.5%
Risk-free interest rate		1.2%		1.5%		1.5%
Expected term (in years)		4.8		4.8		5.0

The stock option activity during 2016 is provided below:

(Options in thousands)	Number of Options		Weighted- Average Exercise Price
Outstanding at beginning of year	8,808	$	32.91
Granted	1,795		34.51
Exercised	(1,143)		(28.57)
Forfeited or expired	(196)		(39.85)

Outstanding at end of year	9,264	$	33.61

Exercisable at end of year	5,849	$	30.71

At December 31, 2016, our outstanding options had an aggregate intrinsic value of $139 million and a weighted-average remaining contractual life of six years. Our exercisable options had an aggregate intrinsic value of $104 million and a weighted-average remaining contractual life of five years at December 31, 2016. The total intrinsic value of options exercised during 2016, 2015 and 2014 was $15 million, $23 million and $25 million, respectively.

Restricted Stock Units

We issue 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 include the right to receive dividend equivalents. The fair value of these units is based on the trading price of our common stock and is recognized ratably over the vesting period. For units payable in stock, we use the trading price on the grant date, while units payable in cash are remeasured using the price at each reporting period date.

The 2016 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	880	$	33.97	1,492	$	34.84
Granted	189		34.50	403		34.59
Vested	(272)		(28.57)	(352)		(27.70)
Forfeited	—		—	(99)		(37.42)

Outstanding at end of year, nonvested	797	$	35.94	1,444	$	36.33

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

(In millions)		2016		2015		2014
Fair value of awards vested	$	20	$	25	$	25
Cash paid		12		20		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 2016 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	549	$	41.84
Granted	285		34.50
Vested	(290)		(39.70)
Forfeited	(9)		(39.56)

Outstanding at end of year, nonvested	535	$	39.13

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

(In millions)		2016		2015		2014
Fair value of awards vested	$	14	$	16	$	20
Cash paid		13		17		12