6.	Employee Benefit Plans

Defined Contribution Retirement Plans

– We maintain a defined contribution

401(k)

retirement savings plan covering all salaried and hourly U.S. employees. Participation is voluntary and participants’ contributions are based on their eligible compensation. We match contributions of participants at

50%

of up to

of salary contributed, up to various statutory limits. In

2016

we made matching contributions to the plan of

$0.6

million. In both

2015

and

2014

we made contributions to the plan of

$0.7

million.

Defined Benefit Retirement Plans

– As a result of the acquisition of Ismeca effective

December

31,

2012,

we took over the Ismeca Europe Semiconductor BVG Pension Plan in Switzerland (“the Swiss Plan”) and the following discussion only relates to the Swiss Plan.

Net periodic benefit cost of the Swiss Plan was as follows

(in thousands)	2016			2015			2014
Service cost	$	868		$	856		$	749
Interest cost		245			311			491
Expected return on assets		(147	)		(193	)		(343	)
Settlements		-			235			-
Net periodic costs	$	966		$	1,209		$	897

The following table sets forth the projected benefit obligation, the fair value of plan assets, the funded status and the liability we have recorded in our consolidated balance sheet related to the Swiss Plan:

(in thousands)	2016			2015
Change in projected benefit obligation:

Benefit obligation at beginning of year	$	(25,483	)	$	(26,027	)
Service cost		(868	)		(856	)
Interest cost		(245	)		(311	)
Actuarial loss		(796	)		(660	)
Participant contributions		(719	)		(672	)
Benefits paid		(214	)		296
Plan change		-			558
Settlements		-			2,199
Foreign currency exchange adjustment		826			(10	)
Benefit obligation at end of year		(27,499	)		(25,483	)

Change in plan assets:

Fair value of plan assets at beginning of year		14,716			15,603
Return on assets, net of actuarial loss		189			277
Employer contributions		719			672
Participant contributions		719			672
Benefits paid		214			(296	)
Settlements		-			(2,199	)
Foreign currency exchange adjustment		(480	)		(13	)
Fair value of plan assets at end of year		16,077			14,716
Net liability at end of year	$	(11,422	)	$	(10,767	)

December

31,

2016

and

December

26,

2015,

the Swiss Plan’s net liability is included in noncurrent accrued retirement benefits. Amounts recognized in accumulated other comprehensive income net of tax related to the Swiss Plan consisted of an unrecognized net actuarial loss totaling

$2.4

million at

December

31,

2016

and

$1.8

million at

December

26,

2015.

Weighted-average actuarial assumptions used to determine the projected benefit obligation under the Swiss Plan are as follows

	2016			2015
Discount rate		0.7	%		1.0	%
Compensation increase		1.5	%		1.8	%

Weighted-average assumptions used to determine net periodic benefit cost of the Swiss Plan are as follows

	2016			2015			2014
Discount rate		1.0	%		1.3	%		2.3	%
Rate of return on Assets		1.0	%		1.3	%		2.3	%
Compensation increase		1.8	%		1.8	%		2.0	%

During

2017

employer and employee contributions to the Swiss Plan are expected to total

$0.7

million. Estimated benefit payments are expected to be as follows:

2017

$0.7

million;

2018

$0.7

million;

2019

$0.8

million;

2020

$1.0

million;

2021

$1.0

million; and

$5.2

million thereafter through

2026.

As is customary with Swiss pension plans, the assets of the plan are invested in a collective fund with multiple employers. We have no investment authority over the assets of the plan that are held and invested by a Swiss insurance company. Investment holdings are made with respect to Swiss laws and target allocations for plan assets are

71%

debt securities and cash,

14%

real estate investments,

alternative investments and

equity securities. The valuation of the collective fund assets as a whole is a Level

measurement; however the individual investments of the fund are generally Level

(equity securities), Level

(fixed income) and Level

(real estate and alternative) investments. We determine the fair value of the plan assets based on information provided by the collective fund, through review of the collective fund’s annual financial statements. See Note

“Financial Instruments Measured at Fair Value” for additional information on the

three

-tier fair value hierarchy.

We maintain other defined benefit plans for employees located outside the U.S. for which the majority of the obligations and net periodic benefit cost were determined to be immaterial for all periods presented.

Retiree Medical Benefits

– We provide post-retirement health benefits to certain executives and directors under a noncontributory plan. The net periodic benefit cost was

$0.1

million in both

2016

and

2015

compared to a net periodic benefit income of

$0.1

million in

2014.

We fund benefits as costs are incurred and as a result there are no plan assets.

The weighted average discount rate used in determining the accumulated post-retirement benefit obligation was

3.9%

2016,

4.2%

2015

and

3.8%

2014.

The annual rates of increase of the cost of health benefits was assumed to be

7.7%

2017.

This rate was then assumed to decrease

0.3%

per year to

4.9%

2026

and remain level thereafter. A

one

percent increase (decrease) in health care cost trend rates would increase (decrease) the

2016

net periodic benefit cost by approximately

$18,000

($14,000)

and the accumulated post-retirement benefit obligation as of

December

31,

2016,

by approximately

$338,000

($283,000).

Contributions to the post-retirement health benefit plan are expected to total

$0.1

million in

2017.

Estimated benefit payments are expected to be as follows:

2017

$0.1

million;

2018

$0.1

million;

2019

$0.1

million;

2020

$0.1

million;

2021

$0.1

million and

$0.7

million thereafter through

2026.

The following table sets forth the post-retirement benefit obligation, funded status and the liability we have recorded in our consolidated balance sheets

(in thousands)	2016			2015
Accumulated benefit obligation at beginning of year	$	2,649		$	2,428
Interest cost		109			90
Actuarial (gain) loss		(185	)		187
Benefits paid		(83	)		(56	)
Accumulated benefit obligation at end of year		2,490			2,649
Plan assets at end of year		-			-
Funded status	$	(2,490	)	$	(2,649	)

Deferred Compensation

– The Cohu, Inc. Deferred Compensation Plan allows certain of our officers to defer a portion of their current compensation. We have purchased life insurance policies on the participants with Cohu as the named beneficiary. Participant contributions, distributions and investment earnings and losses are accumulated in a separate account for each participant. At

December

31,

2016,

the payroll liability to participants, included in accrued compensation and benefits in the consolidated balance sheet, was approximately

$2.4

million and the cash surrender value of the related life insurance policies included in other current assets was approximately

$2.2

million. At

December

26,

2015,

the liability totaled

$2.6

million and the corresponding assets were

$2.3

million.

Employee Stock Purchase Plan

– The Cohu, Inc.

1997

Employee Stock Purchase Plan (“the Plan”) provides for the issuance of a maximum of

2,650,000

shares of our common stock. Under the Plan, eligible employees

may

purchase shares of common stock through payroll deductions. The price paid for the common stock is equal to

85%

of the fair market value of our common stock on specified dates. During the last

three

years we issued shares under the Plan as follows:

2016

110,579;

2015

122,528

and

2014

138,831.

December

31,

2016,

there were

700,484

shares reserved for issuance under the Plan.

Stock Options

– At

December

31,

2016,

a total of

1,853,509

shares were available for future equity grants under the Cohu, Inc.

2005

Equity Incentive Plan (“the

2005

Plan”). Under the

2005

Plan stock options

may

be granted to employees, consultants and outside directors to purchase a fixed number of shares of our common stock at prices not less than

100%

of the fair market value at the date of grant. Options generally vest and become exercisable after

one

year or in

four

annual increments beginning

one

year after the grant date and expire

ten

years from the grant date. We have historically issued new shares of Cohu common stock upon share option exercise.

Stock option activity under our share-based compensation plans was as follows:

	2016					2015					2014
				Wt. Avg.					Wt. Avg.					Wt. Avg.
(in thousands, except per share data)	Shares			Ex. Price		Shares			Ex. Price		Shares			Ex. Price
Outstanding, beginning of year		1,965		$	11.25		2,435		$	11.67		3,086		$	11.93
Granted		-		$	-		10		$	10.98		10		$	12.58
Exercised		(101	)	$	7.89		(175	)	$	8.65		(237	)	$	8.43
Cancelled		(223	)	$	16.19		(305	)	$	16.07		(424	)	$	15.37
Outstanding, end of year		1,641		$	10.79		1,965		$	11.25		2,435		$	11.67

Options exercisable at year end		1,537		$	10.85		1,673		$	11.47		1,901		$	12.08

The aggregate intrinsic value of options exercised was

$0.5

million in

2016

and

$0.7

million in both

2015

and

2014.

December

31,

2016,

the aggregate intrinsic value of options outstanding, vested and expected to vest and exercisable was

$5.6

million.

Information about stock options outstanding at

December

31,

2016

is as follows

(options in thousands)

			Options Outstanding						Options Exercisable
					Approximate
					Wt. Avg.
Range of			Number		Remaining		Wt. Avg.		Number		Wt. Avg.
Exercise Prices			Outstanding		Life (in years)		Ex. Price		Exercisable		Ex. Price
$7.32	-	$10.58		1,089		4.4	$	8.92		1,002	$	8.87
$10.59	-	$15.50		466		3.2	$	14.08		449	$	14.20
$15.51	-	$20.73		86		3.2	$	16.55		86	$	16.55
				1,641		4.0	$	10.79		1,537	$	10.85

Restricted Stock Units

– Under our equity incentive plans, restricted stock units

may

be granted to employees, consultants and outside directors. Restricted stock units vest over a

one

-year,

two

-year or a

four

-year period from the date of grant. Prior to vesting, restricted stock units do not have dividend equivalent rights, do not have voting rights and the shares underlying the restricted stock units are not considered issued and outstanding. New shares of our common stock will be issued on the date the restricted stock units vest net of the statutory tax withholding requirements to be paid by us on behalf of our employees. As a result, the actual number of shares issued will be fewer than the actual number of RSUs outstanding at

December

31,

2016.

Restricted stock unit activity under our share-based compensation plans was as follows

	2016					2015					2014
				Wt. Avg.					Wt. Avg.					Wt. Avg.
(in thousands, except per share data)	Units			Fair Value		Units			Fair Value		Units			Fair Value
Outstanding, beginning of year		1,078		$	9.93		1,026		$	9.54		887		$	9.46
Granted		471		$	11.25		482		$	10.54		497		$	10.07
Released		(409	)	$	9.90		(339	)	$	9.63		(315	)	$	10.16
Cancelled		(57	)	$	10.25		(91	)	$	9.82		(43	)	$	9.41
Outstanding, end of year		1,083		$	10.50		1,078		$	9.93		1,026		$	9.54

Equity-Based Performance Stock Units

–

We grant performance stock units (“PSUs”) to certain senior executives as a part of our long-term equity compensation program. The performance criteria for the PSUs granted in

2016

and

2015

is based on a combination of the Company’s annualized Total Shareholder Return (“TSR”) for the performance period and the relative performance of the Company’s TSR compared with the annualized TSR of certain peer companies for the performance period. The PSU awards granted in

2014

had a

one

-year performance period after which the number of shares of our common stock earned, if any, was determined, subject to certain adjustments resulting from the performance of our TSR relative to a pre-selected comparator group over the

two

-year period following the date of grant. The number of shares of common stock that will ultimately be issued to settle PSUs granted over the last

three

years is as follows:

Year Granted	Range of Awards			Performance Criteria Period (in years)
2016	25%	-	200%		3
2015	25%	-	200%		2
2014	0%	-	150%		2

PSUs granted in

2016

vest

100%

on the

third

anniversary of their grant and PSUs granted in

2015

and

2014

vest

50%

on the

second

and

third

anniversary of their grant, respectively.

We estimated the fair value of the PSUs using a Monte Carlo simulation model on the date of grant. Compensation expense is recognized over the derived service period. New shares of our common stock will be issued on the date the PSUs vest net of the minimum statutory tax withholding requirements to be paid by us on behalf of our employees. As a result, the actual number of shares issued will be fewer than the actual number PSUs outstanding at

December

31,

2016.

PSU activity under our share-based compensation plans was as follows

	2016					2015					2014
				Wt. Avg.					Wt. Avg.					Wt. Avg.
(in thousands, except per share data)	Units			Fair Value		Units			Fair Value		Units			Fair Value
Outstanding, beginning of year		376		$	10.80		334		$	10.49		238		$	9.32
Granted		222		$	11.38		156		$	10.69		208		$	11.34
Released		(172	)	$	11.27		(38	)	$	9.52		(38	)	$	9.52
Cancelled		(23	)	$	8.75		(76	)	$	9.86		(74	)	$	9.59
Outstanding, end of year		403		$	11.04		376		$	10.80		334		$	10.49

Share-based Compensation

– We estimate the fair value of each share-based award on the grant date using the Black-Scholes and the Monte Carlo simulation valuation models. Option valuation models require the input of highly subjective assumptions and changes in the assumptions used can materially affect the grant date fair value of an award. These assumptions for the Black-Scholes model include the risk-free rate of interest, expected dividend yield, expected volatility, and the expected life of the award. The risk-free rate of interest is based on the U.S. Treasury rates appropriate for the expected term of the award as of the grant date. Expected dividends are based primarily on historical factors related to our common stock. Expected volatility is based on historic weekly stock price observations of our common stock during the period immediately preceding the share-based award grant that is equal in length to the award’s expected term. We believe that historical volatility is the best estimate of future volatility. Expected life of the award is based on historical option exercise data. The Monte Carlo simulation model incorporates assumptions for the risk-free interest rate, Cohu and the selected peer group price volatility, the correlation between Cohu and the selected index, and dividend yields. Share-based compensation expense related to restricted stock unit awards is calculated based on the market price of our common stock on the date of grant, reduced by the present value of dividends expected to be paid on our common stock prior to vesting of the restricted stock unit.

The following weighted average assumptions were used to value share-based awards granted:

Employee Stock Purchase Plan	2016			2015			2014
Dividend yield		2.0	%		2.2	%		2.4	%
Expected volatility		31.2	%		35.3	%		35.3	%
Risk-free interest rate		0.3	%		0.1	%		0.1	%
Expected term (years)		0.5			0.5			0.5
Weighted-average grant date fair value per share	$	2.82		$	2.71		$	2.52

Employee Stock Options		2016	(1)		2015			2014
Dividend yield		N/A			2.1	%		2.0	%
Expected volatility		N/A			39.1	%		42.5	%
Risk-free interest rate		N/A			1.6	%		1.9	%
Expected term (years)		N/A			5.9			5.9
Weighted-average grant date fair value per share		N/A		$	3.46		$	4.39

Restricted Stock Units	2016			2015			2014
Dividend yield		2.0	%		2.1	%		2.2	%

Performance Stock Units	2016			2015			2014
Dividend yield		2.0	%		2.1	%		2.2	%

(1)

There were no employee stock options granted in

2016.

Reported share-based compensation is classified in the Consolidated Financial Statements as follows

(in thousands)	2016			2015			2014
Cost of sales	$	398		$	566		$	491
Research and development		1,292			1,092			1,858
Selling, general and administrative		5,453			5,097			4,039
Share-based compensation of continuing operations		7,143			6,755			6,388
Discontinued operations		-			138			388
Income tax benefit		(269	)		(249	)		(204	)
Total share-based compensation, net of tax	$	6,874		$	6,644		$	6,572

We elected to early adopt ASU

2016

in the

fourth

quarter of

2016,

which among other items, provides an accounting policy election to account for forfeitures as they occur, rather than based on an estimate of expected forfeitures. We elected to account for forfeitures as they occur and therefore, share-based compensation expense for the year ended

December

31,

2016

has been calculated based on actual forfeitures in our consolidated statement of income, rather than our previous approach where the expense was net of estimated forfeitures determined at the grant date. The net cumulative effect of this change was recognized as a

$0.2

million increase to paid-in capital and a decrease to retained earnings as of

December

27,

2015.

Share-based compensation expense for the years ended

December

26,

2015

and

December

27,

2014

was recorded net of estimated forfeitures.

December

31,

2016,

we had approximately

$0.1

million of pre-tax unrecognized compensation cost related to unvested stock options which is expected to be recognized over a weighted-average period of approximately

0.5

years.

December

31,

2016,

we had approximately

$9.3

million of pre-tax unrecognized compensation cost related to unvested restricted stock units and performance stock units which is expected to be recognized over a weighted-average period of approximately

2.3

years.