STOCK-BASED COMPENSATION AND EMPLOYEE BENEFIT PLANS

3 Months Ended

Jan. 01, 2012

STOCK-BASED COMPENSATION AND EMPLOYEE BENEFIT PLANS

10. STOCK-BASED COMPENSATION AND EMPLOYEE BENEFIT PLANS

In January 2012, our stockholders approved an amendment to the Microsemi Corporation 2008 Performance Incentive Plan (the “2008 Plan”). The amendment a) increased the share limit by an additional 14.5 million shares so that the new aggregate share limit for the 2008 Plan is 28.5 million shares; b) extended the plan term to December 5, 2021; c) increased the number of shares counted against the share limit for every one share issued in connection with a “Full-Value Award to 2.41; d) terminates the evergreen provision in the original plan; and e) extends the Performance-Based Award feature through the first annual meeting of stockholders that occurs in calendar year 2017. Awards authorized by the 2008 Plan include options, stock appreciation rights, restricted stock, stock bonuses, stock units, performance share awards, and other cash- or share-based awards. The shares issued under the 2008 Plan may be newly issued or shares held by the Company as treasury stock. The maximum term of a stock option grant or a stock appreciation right grant is six years.

Awards granted or assumed, weighted-average exercise price, weighted-average fair value and weighted-average assumptions used in the calculation of compensation expense are as follows:

Quarter Ended	# of Awards		Per Award				Risk Free Rate			Expected Dividend Yield			Expected Life (Years)		Expected Volatility
			Exercise Price		Fair Value
January 1, 2012
Restricted shares		523,800			$	16.27
Performance stock units		350,000			$	17.77
January 2, 2011
Restricted shares		1,686,311			$	20.96
Stock options and share appreciation rights		3,012,245	$	13.88	$	7.12		0.2	%		0.0	%		1.1		41.9	%

In connection with the acquisition of Actel Corporation in 2011, we assumed Actel stock options, stock appreciation rights and restricted stock units and converted them to Microsemi awards in accordance with the merger agreement. In the quarters ended January 1, 2012 and January 2, 2011, stock-based compensation expense decreased operating income by $7.5 million and $7.3 million, respectively.

Compensation expense for stock options and stock appreciation rights was calculated based on the grant or assumption date using the Black-Scholes pricing model. All stock appreciation rights we have granted or assumed are stock-settled. Stock options and stock appreciation rights are granted at exercise prices equal to the closing price of our common stock on the date of grant. Assumed stock options and stock appreciation rights are granted at exercise prices determined in accordance with the acquisition agreement. Expected life was estimated based on historical exercise data that was stratified between members of the Board of Directors, executive employees and all other recipients. Expected volatility was estimated based on historical volatility using equally weighted daily price observations over a period approximately equal to the expected life of each option. The risk free interest rate is based on the implied yield currently available on U.S. Treasury securities with an equivalent remaining term. No dividends are expected to be paid. Restricted stock awards and units are granted to employees with compensation expense determined based on the closing price of our common stock on the date of grant. Stock awards are subject to forfeiture if a participant does not meet length of service requirements.

Performance stock units are subject to performance-based vesting requirements and are reported at target levels in the preceding table. These performance-based awards will generally vest based on the Company’s growth in net sales and earnings per share (subject to certain adjustments) for fiscal years 2012 and 2013 in comparison with the growth in net sales and adjusted earnings per share over the same period for a peer group selected by the Compensation Committee. Half of each performance-based award opportunity will be subject to the growth in net sales metric for the performance period and half will be subject to the growth in earnings per share metric for the performance period. None of the units related to a particular metric will vest if the Company’s performance ranking using that metric is lower than the 30^th percentile relative to the peer group for the performance period, and the maximum number of units related to a particular metric that will vest is capped at 200% of the “target” number of units subject to the award related to that metric (half the total target number of units subject to the total performance-based award). This maximum vesting level will be achieved only if the Company’s performance ranking using that metric is equal to or greater than the 95^th percentile relative to the peer group for the performance period. The “target” number of units subject to an award related to a particular metric (half the total target number of units subject to the total performance-based award) will vest only if the Company’s performance ranking using that metric is at the 70^th percentile of the peer group for the performance period. Thirty percent of the target number of units may vest based on performance for fiscal 2012, with the majority of each award subject to the long-term two year performance period (fiscal years 2012 and 2013).