9. Share‑based payments

The Company accounts for share‑based payments in accordance with applicable accounting standards, under which the fair value of each award is separately estimated and amortized into compensation expense over the service period. The fair value of the Company’s stock option grants are estimated on the grant date using the Black‑Scholes‑Merton valuation model. The application of this valuation model involves assumptions that are judgmental and highly sensitive in the determination of compensation expense. The fair value of the Company’s other share-based awards discussed below are estimated using the Company’s closing stock price on the grant date. Forfeitures are estimated at the time of valuation and reduce expense ratably over the vesting period.

On July 6, 2007, the Company’s Board of Directors adopted the 2007 Stock Incentive Plan, which plan was subsequently amended and restated on several occasions (as so amended and restated, the “Plan”). The Plan allows the granting of stock options, stock appreciation rights, and other stock‑based awards or dividend equivalent rights to key employees, directors, consultants or other persons having a service relationship with the Company, its subsidiaries and certain of its affiliates. The number of shares of Company common stock authorized for grant under the Plan is 31,142,858. As of February 3, 2017, 17,691,607 of such shares are available for future grants.

Since May 2011, most of the share-based awards issued by the Company have been in the form of stock options, restricted stock, restricted stock units and performance share units. With limited exceptions, stock options and restricted stock units granted to employees generally vest ratably on an annual basis over four-year and three-year periods, respectively. Awards granted to board members generally vest over a one-year period. Performance share units generally vest ratably over a three-year period, provided that certain minimum performance criteria are met in the year of grant. With limited exceptions, the performance share unit and restricted stock unit awards are payable in shares of common stock on the vesting date.

From July 2007 through May 2011, a significant majority of the Company’s share-based awards were a combination of stock options that vested solely upon the continued employment of the recipient (“MSA Time Options”) and options that vested upon the achievement of predetermined annual or cumulative financial-based targets (“MSA Performance Options”) (collectively, the “MSA Options”). MSA Options generally vested ratably on an annual basis over a period of approximately five years, with limited exceptions. The MSA Options have a contractual term of 10 years and an exercise price equal to the fair value of the underlying common stock on the date of grant.

The weighted average for key assumptions used in determining the fair value of all stock options granted in the years ended February 3, 2017, January 29, 2016, and January 30, 2015, and a summary of the methodology applied to develop each assumption, are as follows:


	February 3,		January 29,		January 30,
	2017		2016		2015
Expected dividend yield	1.3	%	1.2	%	0	%
Expected stock price volatility	25.4	%	25.3	%	25.6	%
Weighted average risk-free interest rate	1.6	%	1.8	%	1.9	%
Expected term of options (years)	6.3		6.4		6.3

Expected dividend yield - This is an estimate of the expected dividend yield on the Company’s stock. An increase in the dividend yield will decrease compensation expense.

Expected stock price volatility - This is a measure of the amount by which the price of the Company’s common stock has fluctuated or is expected to fluctuate. An increase in the expected volatility will increase compensation expense.

Weighted average risk‑free interest rate - This is the U.S. Treasury rate for the week of the grant having a term approximating the expected life of the option. An increase in the risk‑free interest rate will increase compensation expense.

Expected term of options - This is the period of time over which the options granted are expected to remain outstanding. The Company has estimated the expected term as the mid‑point between the vesting date and the contractual term of the option. An increase in the expected term will increase compensation expense.

A summary of the Company’s stock option activity, exclusive of MSA Options, during the year ended February 3, 2017 is as follows:


		Average		Remaining
	Options	Exercise		Contractual	Intrinsic
(Intrinsic value amounts reflected in thousands)	Issued	Price		Term in Years	Value
Balance, January 29, 2016	2,429,965	$	61.19
Granted	996,984		84.73
Exercised	(524,129)		51.64
Canceled	(204,162)		75.69
Balance, February 3, 2017	2,698,658	$	70.64	7.9	$	18,842
Exercisable at February 3, 2017	675,234	$	54.40	6.4	$	12,849

The weighted average grant date fair value per share of non-MSA options granted was $20.06, $18.48, and $17.26 during 2016, 2015 and 2014, respectively. The intrinsic value of non-MSA options exercised during 2016, 2015, and 2014 was $17.3 million, $20.8 million and $2.5 million, respectively.

The number of performance share unit awards earned is based upon the Company’s annual financial performance in the year of grant as specified in the award agreement. A summary of performance share unit award activity during the year ended February 3, 2017 is as follows:


	Units	Intrinsic
(Intrinsic value amounts reflected in thousands)	Issued	Value
Balance, January 29, 2016	144,097
Granted	121,246
Converted to common stock	(69,393)
Canceled	(21,567)
Balance, February 3, 2017	174,383	$	12,754

The weighted average grant date fair value per share of performance share units granted was $84.67, $74.72 and $57.91 during 2016, 2015, and 2014, respectively.

A summary of restricted stock unit award activity during the year ended February 3, 2017 is as follows:


	Units	Intrinsic
(Intrinsic value amounts reflected in thousands)	Issued	Value
Balance, January 29, 2016	640,910
Granted	282,828
Converted to common stock	(340,916)
Canceled	(80,861)
Balance, February 3, 2017	501,961	$	36,713

The weighted average grant date fair value per share of restricted stock units granted was $84.56, $74.67, and $57.87 during 2016, 2015 and 2014, respectively.

At February 3, 2017, 90,467 MSA Time Options were outstanding, all of which were exercisable, with an average exercise price of $19.06, an average remaining contractual term of 2.7 years, and an aggregate intrinsic value of $4.9 million. The intrinsic value of MSA Time Options exercised during 2016, 2015, and 2014 was $5.3 million, $6.6 million and $6.8 million, respectively.

At February 3, 2017, 66,290 MSA Performance Options were outstanding, all of which were exercisable, with an average exercise price of $19.15, an average remaining contractual term of 2.7 years, and an aggregate intrinsic value of $3.6 million. The intrinsic value of MSA Performance Options exercised during 2016, 2015 and 2014 was $5.5 million, $4.9 million and $4.9 million, respectively.

At February 3, 2017, the total unrecognized compensation cost related to unvested stock‑based awards was $53.7 million with an expected weighted average expense recognition period of 1.6 years.

The fair value method of accounting for share‑based awards resulted in share‑based compensation expense (a component of SG&A expenses) and a corresponding reduction in income before and net of income taxes as follows:


	Stock		Performance		Restricted		Restricted
(In thousands)	Options		Share Units		Stock Units		Stock		Total
Year ended February 3, 2017
Pre-tax	$	12,008	$	7,258	$	17,701	$	—	$	36,967
Net of tax	$	7,325	$	4,427	$	10,798	$	—	$	22,550
Year ended January 29, 2016
Pre-tax	$	11,113	$	4,856	$	22,578	$	—	$	38,547
Net of tax	$	6,779	$	2,962	$	13,772	$	—	$	23,513
Year ended January 30, 2015
Pre-tax	$	8,533	$	5,461	$	15,968	$	7,376	$	37,338
Net of tax	$	5,206	$	3,332	$	9,742	$	4,500	$	22,780