The 3M 2008 Long-Term Incentive Plan, as discussed in 3M's Current Report on Form 8-K dated May 16, 2013 (which updated 3M's 2012 Annual Report on Form 10-K), provides for the issuance or delivery of up to 100 million shares of 3M common stock pursuant to awards granted under the plan. Awards under this plan may be issued in the form of Incentive Stock Options, Nonqualified Stock Options, Progressive Stock Options, Stock Appreciation Rights, Restricted Stock Units, Restricted Stock, Other Stock Awards, and Performance Units and Performance Shares. The remaining total shares available for grant under the 2008 Long Term Incentive Plan Program are 38,329,965 as of September 30, 2013.

The Company's annual stock option and restricted stock unit grant is made in February to provide a strong and immediate link between the performance of individuals during the preceding year and the size of their annual stock compensation grants. The grant to eligible employees uses the closing stock price on the grant date. Accounting rules require recognition of expense under a non-substantive vesting period approach, requiring compensation expense recognition when an employee is eligible to retire. Employees are considered eligible to retire at age 55 and after having completed five years of service. This retiree-eligible population represents 32 percent of the 2013 annual grant stock-based compensation award expense dollars; therefore, higher stock-based compensation expense is recognized in the first quarter. 3M also has granted progressive (reload) options. These options are nonqualified stock options that were granted to certain participants under the 1997 or 2002 MSOP, but for which the reload feature was eliminated in 2005 (on a prospective basis only). Participants who had options granted prior to this effective date may still qualify to receive new progressive (reload) stock options.

In addition to the annual grants, the Company makes other minor grants of stock options, restricted stock units and other stock-based grants. The Company issues cash settled Restricted Stock Units and Stock Appreciation Rights in certain countries. These grants do not result in the issuance of Common Stock and are considered immaterial by the Company.

Amounts recognized in the financial statements with respect to stock-based compensation programs, which include stock options, restricted stock units, restricted stock, performance shares and the General Employees' Stock Purchase Plan (GESPP), are provided in the following table. Capitalized stock-based compensation amounts were not material for the nine months ended September 30, 2013 and 2012.

Stock-Based Compensation Expense

	Three months ended				Nine months ended
	September 30,				September 30,
(Millions)	2013		2012		2013		2012
Cost of sales	$	5	$	6	$	23	$	23
Selling, general and administrative expenses	36		25		149		134
Research, development and related expenses	6		5		25		24

Stock-based compensation expenses	$	47	$	36	$	197	$	181

Income tax benefits	$	(14)	$	(12)	$	(59)	$	(56)

Stock-based compensation expenses, net of tax	$	33	$	24	$	138	$	125

The following table summarizes stock option activity during the nine months ended September 30, 2013:

Stock Option Program
			Number of Options	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (months)	Aggregate Intrinsic Value (millions)
Under option —
	January 1		56,565,030	$	80.33
	Granted:
		Annual	6,220,810		101.55
		Progressive (Reload)	96,770		102.86
	Exercised		(16,270,094)		78.76
	Canceled		(144,488)		89.23
	September 30		46,468,028	$	83.73	63	$	1,658
Options exercisable
	September 30		34,588,636	$	79.78	49	$	1,371

Stock options vest over a period from one year to three years with the expiration date at 10 years from date of grant. As of September 30, 2013, there was $64 million of compensation expense that has yet to be recognized related to non-vested stock option based awards. This expense is expected to be recognized over the remaining weighted-average vesting period of 22 months. The total intrinsic values of stock options exercised were $444 million and $225 million during the nine months ended September 30, 2013 and 2012, respectively. Cash received from options exercised was $1.282 billion and $687 million for the nine months ended September 30, 2013 and 2012, respectively. The Company's actual tax benefits realized for the tax deductions related to the exercise of employee stock options were $164 million and $84 million for the nine months ended September 30, 2013 and 2012, respectively.

For the primary 2013 annual stock option grant, the weighted average fair value at the date of grant was calculated using the Black-Scholes option-pricing model and the assumptions that follow.

	Annual
Stock Option Assumptions	2013
Exercise price	$	101.49
Risk-free interest rate		1.2	%
Dividend yield		2.7	%
Expected volatility		20.0	%
Expected life (months)		75
Black-Scholes fair value	$	13.46

Expected volatility is a statistical measure of the amount by which a stock price is expected to fluctuate during a period. For the 2013 annual grant date, the Company estimated the expected volatility based upon the average of the most recent one year volatility, the median of the term of the expected life rolling volatility, the median of the most recent term of the expected life volatility of 3M stock, and the implied volatility on the grant date. The expected term assumption is based on the weighted average of historical grants.

The following table summarizes restricted stock and restricted stock unit activity during the nine months ended September 30, 2013:

Restricted Stock Units and Restricted Stock
					Weighted Average
Restricted Stock Units and				Number of	Grant Date
Restricted Stock				Awards	Fair Value
Nonvested balance —
	As of January 1			3,261,562	$	85.17
		Granted:
			Annual	946,774		101.57
			Other	41,386		103.29
		Vested		(1,093,895)		79.94
		Forfeited		(42,841)		90.43
	As of September 30			3,112,986	$	92.16

As of September 30, 2013, there was $94 million of compensation expense that has yet to be recognized related to non-vested restricted stock units and restricted stock. This expense is expected to be recognized over the remaining weighted-average vesting period of 25 months. The total fair value of restricted stock units and restricted stock that vested during the nine months ended September 30, 2013 and 2012 was $113 million and $225 million, respectively. The Company's actual tax benefits realized for the tax deductions related to the vesting of restricted stock units and restricted stock was $42 million and $84 million for the nine months ended September 30, 2013 and 2012, respectively.

Restricted stock units granted under the 3M 2008 Long-Term Incentive Plan generally vest three years following the grant date assuming continued employment. Dividend equivalents equal to the dividends payable on the same number of shares of 3M common stock accrue on these restricted stock units during the vesting period, although no dividend equivalents are paid on any of these restricted stock units that are forfeited prior to the vesting date. Dividends are paid out in cash at the vest date on restricted stock units, except for performance shares which do not earn dividends. Since the rights to dividends are forfeitable, there is no impact on basic earnings per share calculations. Weighted average restricted stock unit shares outstanding are included in the computation of diluted earnings per share.

Beginning in 2008, the Company grants certain members of executive management performance shares on an annual basis. The performance criteria, which were modified in 2010, are designed to focus management attention on three key factors that create long-term stockholder value: Organic Sales Growth, Return on Invested Capital and sales from new products. The number of shares of 3M common stock that could actually be delivered at the end of the three-year performance period may be anywhere from 0% to 200% of each performance share granted, depending on the performance of the Company during such performance period. Non-substantive vesting requires that expense for the performance shares be recognized over one or three years depending on when each individual became a 3M executive. The first performance shares, which were granted in 2008, were distributed in 2011. Performance shares do not accrue dividends during the performance period. Therefore, the grant date fair value is determined by reducing the closing stock price on the date of grant by the net present value of dividends during the performance period. As a result of the significant uncertainty due to the economic crisis of 2008-2009, the Company granted restricted stock units instead of performance shares in 2009. Therefore, since there were no performance shares in 2009, there were also no related distributions in 2012. Performance share grants resumed in 2010 and continued thereafter.

The following table summarizes performance share activity during the nine months ended September 30, 2013:

				Weighted Average
			Number of	Grant Date
Performance Shares			Awards	Fair Value
Undistributed balance —
	As of January 1		1,089,084	$	79.27
		Granted	345,948		96.33
		Distributed	(507,083)		75.16
		Performance change	(9,615)		82.32
		Forfeited	(27,792)		90.48
	As of September 30		890,542	$	87.86

As of September 30, 2013, there was $20 million of compensation expense that has yet to be recognized related to performance shares. This expense is expected to be recognized over the remaining weighted-average earnings period of 10 months. The total fair value of performance shares that were distributed during the nine months ended September 30, 2013 was $52 million and actual tax benefits realized for the tax deductions related to the distribution of performance shares was $16 million. There were no performance shares distributed or related tax benefits realized during the nine months ended September 30, 2012.