4. Stock 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 the fair market value of our common stock on the date of the grant. The options have a 10-year term and generally vest ratably over four years. Our options 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. Our RSUs continue to vest after the recipient retires. Holders of 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 compensation expense recognized is as follows:

	For Years Ended December 31,
	2016		2015		2014
COR	$	40	$	47	$	48
R&D		60		60		62
SG&A		152		169		156
Acquisition charges		—		10		11
Total	$	252	$	286	$	277

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). 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. 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 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,
	2016			2015			2014
Weighted average grant date fair value, per share	$	10.03		$	9.49		$	8.13
Weighted average assumptions used:
Expected volatility		25	%		22	%		22	%
Expected lives (in years)		7.3			7.3			7.3
Risk-free interest rates		1.72	%		1.64	%		2.45	%
Expected dividend yields		2.87	%		2.52	%		2.72	%

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 are as follows:

	Stock Options					RSUs
				Weighted Average					Weighted Average
				Exercise Price					Grant Date Fair
	Shares			per Share		Shares			Value per Share
Outstanding grants, December 31, 2015		56,773,983		$	37.45		16,055,542		$	38.51
Granted		10,974,304			53.02		2,337,976			53.98
Vested RSUs		—			—		(5,639,666	)		31.64
Forfeited and expired		(965,893	)		48.12		(421,473	)		42.63
Exercised		(14,516,606	)		32.51		—			—
Outstanding grants, December 31, 2016		52,265,788			41.89		12,332,379			44.44

The weighted average grant date fair values per share of RSUs granted in 2016, 2015 and 2014 were $53.98, $53.22 and $44.71, respectively. In 2016, 2015 and 2014, the total grant date fair values of shares vested from RSU grants were $178 million, $114 million and $133 million, respectively.

Summarized information about stock options outstanding as of December 31, 2016, is as follows:

		Stock Options Outstanding						Options Exercisable
		Number		Weighted Average		Weighted Average		Number		Weighted Average
Exercise Price		Outstanding		Remaining Contractual		Exercise Price		Exercisable		Exercise Price
Range		(Shares)		Life (Years)		per Share		(Shares)		per Share
$	14.47 to 20.00		1,996,801		2.1	$	14.96		1,996,801	$	14.96
	20.01 to 30.00		5,130,177		2.6		24.59		5,130,177		24.59
	30.01 to 40.00		14,126,454		5.3		33.06		11,328,597		33.12
	40.01 to 50.00		9,854,196		7.1		44.10		3,544,639		44.10
	50.01 to 60.00		21,103,396		8.6		53.44		2,017,172		53.96
	60.01 to 71.27		54,764		9.7		71.00		—		—
	14.47 to 71.27		52,265,788		6.6		41.89		24,017,386		33.16

In 2016, 2015 and 2014, the aggregate intrinsic values (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 were $424 million, $290 million and $367 million, respectively.

Summarized information as of December 31, 2016, 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		Options
	Expected to Vest) (a)		Exercisable
Number of outstanding (shares)		50,994,139		24,017,386
Weighted average remaining contractual life (in years)		6.5		4.9
Weighted average exercise price per share	$	41.63	$	33.16
Intrinsic value (millions of dollars)	$	1,598	$	956

(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 $1,624 million.

As of December 31, 2016, the total future compensation cost related to equity awards not yet recognized in our Consolidated Statements of Income was $250 million, consisting of $111 million related to unvested stock options and $139 million related to unvested RSUs. The $250 million is expected to be recognized as follows: $129 million in 2017, $80 million in 2018, $37 million in 2019 and $4 million in 2020.

Director deferred compensation

Directors who retire or resign from the board may receive stock distributions for compensation they elected to defer. Director deferred stock activity is as follows:

	Director Deferred Stock
	(Shares)
Outstanding, December 31, 2015		142,913
New shares deferred		14,319
Issued		(13,587	)
Outstanding, December 31, 2016		143,645

Employee stock purchase plan

Options outstanding under the employee stock purchase plan as of December 31, 2016, 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 3, 2017, resulting in an exercise price of $62.55 per share. Of the total outstanding options, none were exercisable as of December 31, 2016.

Employee stock purchase plan transactions are as follows:

	Employee Stock
	Purchase Plan
	(Shares)			Exercise Price
Outstanding grants, December 31, 2015		372,566		$	46.19
Granted		1,273,036			55.51
Exercised		(1,362,202	)		51.50
Outstanding grants, December 31, 2016		283,400			62.55

The weighted average grant date fair values per share of options granted under the employee stock purchase plans in 2016, 2015 and 2014 were $9.79, $7.89 and $7.34, respectively. In 2016, 2015 and 2014, the total intrinsic value of options exercised under these plans was $12 million per year.

Effect on shares outstanding and treasury shares

Treasury shares were acquired in connection with the board-authorized stock repurchase program. As of December 31, 2016, $5.80 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 following table reflects the changes in our treasury shares:

	Stock Options			RSUs			Treasury Shares
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

Repurchases								51,384,339
Shares used for:
Stock options/RSUs		(11,953,455	)		(3,386,415	)
Stock applied to exercises or taxes		8,562			845,164
ESPP		(1,532,264	)		—
Director deferred stock		—			—			(7,531	)
Total issued		(13,477,157	)		(2,541,251	)		(16,018,408	)
Balance, December 31, 2015								729,547,527

Repurchases								35,480,036
Shares used for:
Stock options/RSUs		(14,516,606	)		(5,639,666	)
Stock applied to exercises or taxes		—			1,336,476
ESPP		(1,362,202	)		—
Director deferred stock		—			—			(13,587	)
Total issued		(15,878,808	)		(4,303,190	)		(20,181,998	)
Balance, December 31, 2016								744,831,978

Shares available for future grants and reserved for issuance are as follows:

	December 31, 2016
	Long-Term			Director			Employee Stock
Shares	Incentive Plans			Compensation Plans (a)			Purchase Plan			Total
Reserved for issuance		123,296,771			2,341,272			36,670,572			162,308,615
Shares to be issued upon exercise of outstanding options and RSUs		(63,715,186	)		(1,026,626	)		(283,400	)		(65,025,212	)
Available for future grants		59,581,585			1,314,646			36,387,172			97,283,403

(a)	Includes 143,645 shares credited to directors’ deferred stock accounts that settle in shares of TI common stock. These shares are not included as grants outstanding as of December 31, 2016.

The effects on cash flows are as follows:

	For Years Ended December 31,
	2016			2015			2014
Proceeds from common stock transactions (a)	$	472		$	396		$	554

Tax benefit realized from stock compensation	$	255		$	171		$	218
Reduction to deferred income tax asset		(105	)		(81	)		(108	)
Excess tax benefit for stock compensation	$	150		$	90		$	110

(a)	Net of taxes paid for employee shares withheld of $70 million in 2016, $46 million in 2015 and $62 million in 2014.