Equity-Based Compensation

12 Months Ended

Dec. 31, 2011

Share-based Compensation [Abstract]

Equity-Based Compensation

EQUITY-BASED COMPENSATION

Restricted Stock Units

Restricted stock units and awards (RSUs) have been issued to certain employees at fair market value at the date of grant. These awards entitle the holder to receive one common share for each RSU upon vesting, generally over three or four years. A summary of the RSU activity for 2011 follows:

(Restricted stock units in millions)	Number of restricted stock units		Weighted-average fair value per award
Non-vested at January 1	5.2		$	26.48
Granted	1.1		53.53
Vested	(1.3	)	25.92
Forfeited	(0.2	)	30.83
Non-vested at December 31	4.8		$	33.02

Information related to RSUs follows:

	2011		2010		2009
Pretax expense for RSUs	$	50	$	39	$	25
After-tax expense for RSUs	32		25		17

As of December 31, 2011, total compensation expense not yet recognized related to non-vested RSUs was $90, and the weighted-average period in which the expense is expected to be recognized is 2.9 years. Excess tax benefit for restricted stock units and other equity-based compensation totaled $24 for 2011.

Stock Options

Under various plans, stock options have been granted to certain employees and directors to purchase common shares at prices equal to fair market value on the date of grant. Substantially all of these options vest ratably during the three-year period following the date of grant and expire 10 years from the date of grant. Compensation expense is recognized for stock options based on the fair value of the options at the date of grant and amortized on a straight-line basis over the period the employee or director is required to provide service.

The Company uses a Black-Scholes option pricing model to estimate the fair value of stock options. The principal assumptions utilized in valuing stock options include the expected stock price volatility (based on the most recent historical period equal to the expected life of the option); the expected option life (an estimate based on historical experience); the expected dividend yield; and the risk-free interest rate (an estimate based on the yield of United States Treasury zero coupon with a maturity equal to the expected life of the option). A summary of the assumptions used in determining the fair value of stock options follows:

	2011			2010			2009
Expected volatility	33		%	31		%	30		%
Expected option life in years	5.5			5.5			5.5
Expected dividend yield	2.0		%	2.0		%	2.0		%
Risk-free interest rate	2.2% to 1.4%			2.4% to 1.3%			2.2% to 1.7%
Weighted-average fair value of stock options granted	$	14.56		$	8.98		$	5.14

A summary of stock option activity follows:

(Options in millions)	Weighted-average price per option		Options		Weighted-average remaining contractual life in years	Aggregate intrinsic value
Outstanding at January 1, 2011	$	34.62	14.9
Granted	53.45		0.8
Exercised	28.79		(2.5	)
Forfeited and canceled	36.85		(0.1	)
Outstanding at December 31, 2011	$	36.84	13.1		4.3	$	96
Exercisable at December 31, 2011	$	35.84	12.2		4.0	$	94
Reserved for future grants at December 31, 2011			7.5

The aggregate intrinsic value in the table above represents the total excess of the $43.53 closing price of Eaton common shares on the last trading day of 2011 over the exercise price of the stock option, multiplied by the related number of options outstanding and exercisable. The aggregate intrinsic value is not recognized for financial accounting purposes and the value changes based on the daily changes in the fair market value of the Company's common shares.

Information related to stock options follows:

	2011		2010		2009
Pretax expense for stock options	$	5	$	11	$	28
After-tax expense for stock options	4		8		19
Proceeds from stock options exercised	71		157		27
Income tax benefit related to stock options exercised
Tax benefit classified in operating activities in the Consolidated    Statements of Cash Flows	13		—		2
Excess tax benefit classified in financing activities in the    Consolidated Statements of Cash Flows	33		—		4
Intrinsic value of stock options exercised	62		98		19
Total fair value of stock options vesting	$	5	$	11	$	22
Stock options exercised, in millions of options	2.541		6.096		1.688

As of December 31, 2011, total compensation expense not yet recognized related to non-vested stock options was $9, and the weighted-average period in which the expense is expected to be recognized is 2.2 years.