Stock-Based Compensation—Stock options and restricted stock units have been issued to officers and other management employees under ITW’s 2011 Long-Term Incentive Plan (the “Plan”). The stock options generally vest over a four-year period and have a maturity of ten years from the issuance date. Restricted stock units generally vest after a three-year period and include units with and without performance criteria. To cover the exercise of vested options and vesting of restricted stock units in 2011 and 2012, the Company generally issued new shares from its authorized but unissued share pool. Commencing in February 2013, the Company issued shares from treasury stock. At December 31, 2013, approximately 38 million shares of ITW common stock were reserved for issuance under the Plan. The Company records compensation expense for the grant date fair value of stock awards over the remaining service periods of those awards.

The following summarizes the Company’s stock-based compensation expense:



In millions	2013			2012			2011
Pre-tax compensation expense	$	30		$	50		$	51
Tax benefit	(10		)	(18		)	(16		)
Total stock-based compensation recorded as expense, net of tax	$	20		$	32		$	35

Pre-tax compensation expense included in income from discontinued operations was $6 million in 2013, $4 million in 2012 and $5 million in 2011.

The following table summarizes activity related to non-vested restricted stock units during 2013:



Shares in millions	Number of Shares		Weighted-Average Grant-Date Fair Value
Unvested, January 1, 2013	1.6		$47.36
Granted	0.5		59.03
Vested	(0.6	)	40.19
Canceled	(0.1	)	50.51
Unvested, December 31, 2013	1.4		54.02

The following table summarizes stock option activity under the Plan for the year ended December 31, 2013:



In millions except exercise price and contractual terms	Number of Shares		Weighted-Average Exercise Price	Weighted-Average Remaining Contractual Term	Aggregate Intrinsic Value
Under option, January 1, 2013	12.8		$48.50
Granted	1.3		63.86
Exercised	(4.5	)	45.70
Canceled or expired	(0.2	)	50.94
Under option, December 31, 2013	9.4		51.95	6.1 years	$300
Exercisable, December 31, 2013	6.3		48.98	5.0 years	$222

The Company's annual equity awards consist of stock options, restricted stock units (“RSUs”) and performance restricted stock units (“PRSUs”). The RSUs provide for full “cliff” vesting three years from the date of grant. The PRSUs provide for full “cliff” vesting after three years if the Compensation Committee certifies that the performance goals set with respect to the PRSUs have been met. Upon vesting, the holder will receive one share of common stock of the Company for each vested RSU or PRSU. Option exercise prices are equal to the common stock fair market value on the date of grant. The fair value of RSUs and PRSUs is determined by reducing the closing market price on the date of the grant by the present value of projected dividends over the vesting period. The Company uses a binomial option pricing model to estimate the fair value of the stock options granted. The following summarizes the assumptions used in the models:



	2013	2012	2011
Risk-free interest rate	0.2-2.9%	0.2-2.1%	0.3-3.8%
Weighted-average volatility	21.1%	25.0%	25.0%
Dividend yield	2.72%	2.61%	2.80%
Expected years until exercise	6.6-7.6	7.6-7.8	7.6-7.9

Lattice-based option valuation models, such as the binomial option pricing model, incorporate ranges of assumptions for inputs. The risk-free rate of interest for periods within the contractual life of the option is based on a zero-coupon U.S. government instrument over the contractual term of the equity instrument. Expected volatility is based on implied volatility from traded options on the Company’s stock and historical volatility of the Company’s stock. The Company uses historical data to estimate option exercise timing and employee termination rates within the valuation model. The weighted-average dividend yield is based on historical information. The expected term of options granted is derived from the output of the option valuation model and represents the period of time that options granted are expected to be outstanding. The ranges presented result from separate groups of employees assumed to exhibit different behavior.

The weighted-average grant-date fair value of options granted during 2013, 2012 and 2011 was $10.06, $11.48 and $12.34 per share, respectively. The aggregate intrinsic value of options exercised during the years ended December 31, 2013, 2012 and 2011 was $108 million, $84 million and $63 million, respectively. As of December 31, 2013, there was $17 million of total unrecognized compensation cost related to unvested stock options. That cost is expected to be recognized over a weighted-average period of 2.5 years. Exercise of options during the years ended December 31, 2013, 2012 and 2011 resulted in cash receipts of $206 million, $285 million and $151 million, respectively. The total fair value of vested stock option awards during the years ended December 31, 2013, 2012 and 2011 was $16 million, $48 million and $33 million, respectively.

As of December 31, 2013, there was $21 million of total unrecognized compensation cost related to unvested restricted stock units. That cost is expected to be recognized over a weighted-average remaining contractual life of 1.8 years. The total fair value of vested restricted stock unit awards during the years ended December 31, 2013, 2012 and 2011 was $23 million, $31 million and $1 million, respectively.