Share Based Compensation

12 Months Ended

Dec. 31, 2011

Share-Based Compensation [Abstract]

Share Based Compensation

Note 12. Share-Based Compensation

Our 2007 Long-Term Incentive Plan (Plan) supersedes the 1999 Long-Term Incentive Plan and 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 paid in cash based upon the value of our common stock.

Through our Deferred Income Plan for Textron Executives (DIP), we provide Schedule A participants 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. We generally contribute a 10% premium on amounts deferred into the stock unit account. Executives who are eligible to participate in the DIP but 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; these deferrals are not entitled to the 10% premium contribution on the amount deferred. Participants cannot move amounts between the two accounts while actively employed by us and cannot receive distributions until termination of employment.

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)	2011			2010			2009
Compensation expense	$	50		$	85		$	83
Income tax benefit		(18	)		(32	)		(30)
Total net compensation cost included in net income	$	32		$	53		$	53

Compensation expense includes approximately $17 million, $7 million and $9 million in 2011, 2010 and 2009, respectively, representing the attribution of the fair value of options issued and the portion of previously granted options for which the requisite service has been rendered.

Stock Options

Options to purchase our shares have a maximum term of 10 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. The weighted-average fair value of options granted per share was $10, $7, and $2 for 2011, 2010 and 2009, respectively. 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. We use historical data to estimate option exercise behavior, adjusted to reflect anticipated increases in expected life.

During 2010, we executed a one-time stock option exchange program, which provided eligible employees, other than executive officers, an opportunity to exchange certain outstanding stock options with exercise prices substantially above the current market price of our common stock for a lesser number of stock options with an exercise price set at current market value and a fair value that was approximately 15% lower than the fair value of the “out of the money” options that they replaced. As a result of this program, 2.6 million outstanding eligible stock options were exchanged for 1.0 million new options at an exercise price of $20.76. The new options vested on July 30, 2011 or, if later, on the original vesting date of the eligible stock option for which it was exchanged. The new options were treated as a modification under the accounting guidance for equity-based compensation. Accordingly, since we discounted the fair value of the new options by 15% of the fair value of the options exchanged, we did not incur any incremental expense associated with the modification.

The weighted-average assumptions used in our Black-Scholes option-pricing model for awards issued during the respective periods are as follows:

	2011		2010		2009
Dividend yield		0.3%		0.4%		1.4%
Expected volatility		38.0%		37.0%		50.0%
Risk-free interest rate		2.4%		2.6%		2.0%
Expected term (in years)		5.5		5.5		5.0

The stock option activity under the Plan in 2011 is provided below:

(Options in thousands)	Number of Options			Weighted- Average Exercise Price
Outstanding at beginning of year		6,926		$	28.15
Granted		2,995			25.84
Exercised		(177	)		15.35
Canceled, expired or forfeited		(884	)		27.94
Outstanding at end of year		8,860		$	27.68
Exercisable at end of year		5,091		$	30.14

At December 31, 2011, our outstanding options had an aggregate intrinsic value of $8 million and a weighted-average remaining contractual life of six years. Our exercisable options had an aggregate intrinsic value of $5 million and a weighted-average remaining contractual life of three years at December 31, 2011.

Restricted Stock Units

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), until the first quarter of 2009, when we began issuing restricted stock units settled in cash (vesting in equal installments over five years). In 2011, we issued restricted stock units settled in both cash and stock (vesting in equal installments over five years). Since 2008, all restricted stock units have been issued with the right to receive dividend equivalents. For restricted stock units paid in stock that were issued prior to 2008, the fair value is based on the trading price of our common stock on the grant date, less required adjustments to reflect the fair value of the awards as dividends are not paid or accrued on these units until the restricted stock units vest. For restricted stock units paid in cash and stock that were issued in 2008 and later, the fair value of these units is based solely on the trading price of our common stock on the grant date. The 2011 activity for restricted stock units is provided below:

	Units Payable in Stock						Units Payable in Cash
(Shares in thousands)	Number of Shares			Weighted- Average Grant Date Fair Value			Number of Shares			Weighted-   Average Grant   Date Fair Value
Outstanding at beginning of year, nonvested		762			$      47.55			3,472			$      14.60
Granted		373			25.27			695			26.05
Vested		(393	)		(47.36	)		(863	)		(13.94)
Forfeited		(104	)		(42.14	)		(377	)		(15.94)
Outstanding at end of year, nonvested		638			$      35.53			2,927			$      17.33

Performance Share Units

The fair value of share-based compensation awards accounted for as liabilities includes performance share units, which are typically paid in cash in the first quarter of the year following vesting. Payouts under performance share units vary based on certain performance criteria generally measured over a three-year 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, less adjustments to reflect the fair value of certain awards for which dividends are not paid or accrued until vested, and is remeasured at each reporting period date. The 2011 activity for our performance share units is as follows:

(Shares in thousands)	Number of Shares			Weighted-   Average Grant   Date Fair   Value
Outstanding at beginning of year, nonvested		1,897		$	9.59
Granted		445			26.25
Vested		(1,250	)		(5.65)
Forfeited		(233	)		(13.23)
Outstanding at end of year, nonvested		859		$	22.98

Share-Based Compensation Awards

The value of the share-based compensation awards that vested and/or were paid during the respective periods is as follows:

(In millions)	2011		2010		2009
Subject only to service conditions:
Value of shares, options or units vested	$	41	$	31	$	42
Intrinsic value of cash awards paid		23		13		1
Subject to performance vesting conditions:
Value of units vested		33		11		21
Intrinsic value of cash awards paid		1		5		10
Intrinsic value of amounts paid under DIP		1		9		1

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, 2011, we had not recognized $45 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 2.2 years.