Stock-based compensation

We have stock options outstanding to participants under long-term incentive plans. We also have assumed stock options that were granted by companies that we later acquired. Unless the options are acquisition-related replacement options, the option price per share may not be less than 100 percent of the fair market value of our common stock on the date of the grant. Substantially all the options have a 10-year term and vest ratably over four years. Our options generally continue to vest after the option recipient retires.

We also have RSUs outstanding under long-term incentive plans. Each RSU represents the right to receive one share of TI common stock on the vesting date, which is generally four years after the date of grant. Upon vesting, the shares are issued without payment by the grantee. Beginning with 2013 grants, RSUs generally continue to vest after the recipient retires. Holders of most RSUs receive an annual cash payment equivalent to the dividends paid on our common stock.

We have options and RSUs outstanding to non-employee directors under director compensation plans. The plans generally provide for annual grants of stock options and RSUs, a one-time grant of RSUs to each new non-employee director and the issuance of TI common stock upon the distribution of stock units credited to deferred compensation accounts established for such directors.

We also have an employee stock purchase plan under which options are offered to all eligible employees in amounts based on a percentage of the employee’s compensation, subject to a cap. Under the plan, the option price per share is 85 percent of the fair market value on the exercise date, and options have a three-month term.

Total stock-based compensation expense recognized was as follows:



	For Years Ended December 31,
	2014		2013		2012
Stock-based compensation expense recognized in:
COR	$	48	$	49	$	48
R&D	62		67		71
SG&A	156		160		127
Acquisition charges	11		11		17
Total	$	277	$	287	$	263

These amounts include expenses related to non-qualified stock options, RSUs and stock options offered under our employee stock purchase plan and are net of expected forfeitures.

We issue awards of non-qualified stock options with graded vesting provisions (e.g., 25 percent per year for four years). Generally, we recognize the related compensation expense on a straight-line basis over the minimum service period required for vesting of the award, adjusting for expected forfeiture activity. Awards issued to employees who are retirement eligible or nearing retirement eligibility are expensed on an accelerated basis.

Our RSUs generally vest four years after the date of grant. We recognize the related compensation expense on a straight-line basis over the vesting period, adjusting for expected forfeiture activity. Beginning with 2013 grants, RSUs issued to employees who are retirement eligible or nearing retirement eligibility are expensed on an accelerated basis.

Fair-value methods and assumptions

We account for all awards granted under our various stock-based compensation plans at fair value. We estimate the fair values for non-qualified stock options using the Black-Scholes-Merton option-pricing model with the following weighted average assumptions.



	For Years Ended December 31,
	2014			2013			2012
Weighted average grant date fair value, per share	$	8.13		$	6.78		$	8.31
Weighted average assumptions used:
Expected volatility	22		%	26		%	30		%
Expected lives (in years)	7.3			7.4			7.1
Risk-free interest rates	2.45		%	1.43		%	1.40		%
Expected dividend yields	2.72		%	2.56		%	2.10		%

We determine expected volatility on all options granted using available implied volatility rates. We believe that market-based measures of implied volatility are currently the best available indicators of the expected volatility used in these estimates.

We determine expected lives of options based on the historical option exercise experience of our optionees using a rolling 10-year average. We believe the historical experience method is the best estimate of future exercise patterns currently available.

Risk-free interest rates are determined using the implied yield currently available for zero-coupon U.S. government issues with a remaining term equal to the expected life of the options.

Expected dividend yields are based on the annualized approved quarterly dividend rate and the current market price of our common stock at the time of grant. No assumption for a future dividend rate change is included unless there is an approved plan to change the dividend in the near term.

The fair value per share of RSUs is determined based on the closing price of our common stock on the date of grant.

Our employee stock purchase plan is a discount-purchase plan and consequently the Black-Scholes-Merton option-pricing model is not used to determine the fair value per share of these awards. The fair value per share under this plan equals the amount of the discount.

Long-term incentive and director compensation plans

Stock option and RSU transactions under our long-term incentive and director compensation plans during 2014 were as follows:



	Stock Options				RSUs
	Shares		Weighted Average Exercise Price per Share		Shares		Weighted Average Grant Date Fair Value per Share
Outstanding grants, December 31, 2013	64,930,540		$	28.98	20,892,022		$	29.94
Granted	14,053,185		44.11		3,184,237		44.71
Vested RSUs	—		—		(5,609,627	)	23.68
Forfeited and expired	(1,832,897	)	36.54		(1,162,817	)	33.22
Exercised	(19,503,382	)	27.75		—		—
Outstanding grants, December 31, 2014	57,647,446		32.84		17,303,815		34.47

The weighted average grant date fair value of RSUs granted during the years 2014, 2013 and 2012 was $44.71, $33.70 and $31.60 per share, respectively. For the years ended December 31, 2014, 2013 and 2012, the total grant date fair value of shares vested from RSU grants was $133 million, $98 million and $120 million, respectively.

Summarized information about stock options outstanding at December 31, 2014, is as follows:



		Stock Options Outstanding				Options Exercisable
Range of Exercise Price		Number Outstanding (Shares)	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price per Share		Number Exercisable (Shares)	Weighted Average Exercise Price per Share
$	14.47 to 20.00	4,061,577	4.0	$	14.98	4,061,577	$	14.98
	20.01 to 30.00	11,270,125	3.7	25.47		11,250,200	25.46
	30.01 to 40.00	28,910,636	6.5	33.00		12,288,339	33.14
	40.01 to 50.00	13,399,020	9.1	44.10		1,750	42.66
	50.01 to 55.41	6,088	9.9	55.41		—	—
	14.47 to 55.41	57,647,446	6.4	32.84		27,601,866	27.34

During the years ended December 31, 2014, 2013 and 2012, the aggregate intrinsic value (i.e., the difference in the closing market price on the date of exercise and the exercise price paid by the optionee) of options exercised was $367 million, $427 million and $244 million, respectively.

Summarized information as of December 31, 2014, about outstanding stock options that are vested and expected to vest, as well as stock options that are currently exercisable, is as follows:



	Outstanding Stock Options (Fully Vested and Expected to Vest) (a)		Options Exercisable
Number of outstanding (shares)	56,328,323		27,601,866
Weighted average remaining contractual life (in years)	6.3		4.4
Weighted average exercise price per share	$	32.69	$	27.34
Intrinsic value (millions of dollars)	$	1,170	$	721

(a) Includes effects of expected forfeitures of approximately 1 million shares. Excluding the effects of expected forfeitures, the aggregate intrinsic value of stock options outstanding was $1,189 million.

As of December 31, 2014, the total future compensation cost related to equity awards not yet recognized in the Consolidated Statements of Income was $308 million, consisting of $113 million related to unvested stock options and $195 million related to unvested RSUs. The $308 million is expected to be recognized as follows: $168 million in 2015, $91 million in 2016, $44 million in 2017 and $5 million in 2018.

Director deferred compensation

Directors who retire or resign from the board may receive stock distributions for compensation they elected to defer. For these stock distributions, we issued treasury shares. Director deferred stock activity during 2014 was as follows:



	Director Deferred Stock (Shares)
Outstanding, December 31, 2013	129,264
New shares deferred	13,636
Issued	(7,178	)
Outstanding, December 31, 2014	135,722

Employee stock purchase plan

Options outstanding under the employee stock purchase plan at December 31, 2014, had an exercise price equal to 85 percent of the fair market value of TI common stock on the date of automatic exercise. The automatic exercise occurred on January 2, 2015, resulting in an exercise price of $45.46 per share. Of the total outstanding options, none were exercisable at year-end 2014.

Employee stock purchase plan transactions during 2014 were as follows:



	Employee Stock Purchase Plan (Shares)		Exercise Price
Outstanding grants, December 31, 2013	485,408		$	36.64
Granted	1,673,479		41.60
Exercised	(1,784,184	)	39.44
Outstanding grants, December 31, 2014	374,703		45.46

The weighted average grant date fair value of options granted under the employee stock purchase plans during the years 2014, 2013 and 2012 was $7.34, $5.71 and $4.52 per share, respectively. During the years ended December 31, 2014, 2013 and 2012, the total intrinsic value of options exercised under these plans was $12 million, $13 million and $13 million, respectively.

Effect on shares outstanding and treasury shares

Treasury shares were acquired in connection with the board-authorized stock repurchase program. As of December 31, 2014, $3.17 billion of stock repurchase authorizations remain, and no expiration date has been specified.

Our current practice is to issue shares of common stock from treasury shares upon exercise of stock options, distribution of director deferred compensation and vesting of RSUs. The table below reflects the changes in our treasury shares:



	Stock Options		RSUs		Treasury Shares
Balance, December 31, 2011					601,131,631
Repurchases					59,757,780
Shares used for:
Stock options/RSUs	(22,409,816	)	(4,182,928	)
Previously unissued common shares (a)	180,955		4,593
Stock applied to taxes	—		990,845
ESPP	(2,829,498	)	—
Director deferred stock	—		—		(6,592	)
Total issued	(25,058,359	)	(3,187,490	)	(28,245,849	)
Balance, December 31, 2012					632,636,970

Repurchases					77,564,013
Shares used for:
Stock options/RSUs	(45,507,711	)	(5,741,981	)
Stock applied to taxes	—		1,461,422
ESPP	(2,386,834	)	—
Director deferred stock	—		—		(12,909	)
Total issued	(47,894,545	)	(4,280,559	)	(52,175,104	)
Balance, December 31, 2013					658,012,970

Repurchases					61,665,209
Shares used for:
Stock options/RSUs	(19,503,382	)	(5,609,627	)
Stock applied to exercises or taxes	6,618		1,408,701
ESPP	(1,784,184	)	—
Director deferred stock	—		—		(7,178	)
Total issued	(21,280,948	)	(4,200,926	)	(25,481,874	)
Balance, December 31, 2014					694,189,127

(a) Beginning in 2013, only treasury shares were issued.

Shares available for future grants and reserved for issuance are summarized below:



	December 31, 2014
Shares	Long-Term Incentive and Director Compensation Plans		Employee Stock Purchase Plan		Total
Reserved for issuance (a)	121,127,656		39,565,038		160,692,694
Shares to be issued upon exercise of outstanding options and RSUs (a)	(75,086,983	)	(374,703	)	(75,461,686	)
Available for future grants	46,040,673		39,190,335		85,231,008

(a) Includes 135,722 shares credited to directors’ deferred stock accounts that settle in shares of TI common stock. These shares are not included as grants outstanding at December 31, 2014.

The effects on cash flows were as follows:



	For Years Ended December 31,
	2014		2013		2012
Proceeds from common stock transactions	$	616	$	1,314	$	523
Tax benefit realized from stock options exercised	218		227		133