Note 18: Employee Equity Incentive Plans

Our equity incentive plans are broad-based, long-term programs intended to attract and retain talented employees and align stockholder and employee interests.

In May 2015, stockholders approved an extension of the expiration date of the 2006 Equity Incentive Plan (the 2006 Plan) to June 2018 and approved an additional 34 million shares for issuance. Under the 2006 Plan, 753 million shares of common stock are available for issuance as equity awards to employees and non-employee directors through June 2018. As of December 26, 2015, 258.4 million shares of common stock remained available for issuance under the 2006 Plan.

Going forward, we may assume the equity incentive plans and the outstanding equity awards of certain acquired companies. Once they are assumed, we do not grant additional shares of common stock under those plans. The stock options and RSUs assumed generally retain their terms and conditions as they were originally granted.

We grant restricted stock units with both a market condition and a service condition (market-based restricted stock units), referred to in our 2015 Proxy Statement as outperformance stock units (OSUs), to a group of senior officers, employees, and non-employee directors. For OSUs granted in 2015, the number of shares of our common stock to be received at vesting will range from 0% to 200% of the target amount, based on total stockholder return (TSR) on our common stock measured against the benchmark TSR of a peer group over a three-year period. TSR is a measure of stock price appreciation plus any dividends paid in this performance period. As of December 26, 2015, 4.7 million OSUs were outstanding. These OSUs accrue dividend equivalents and generally vest three years and one month from the grant date. RSU and option awards generally vest over four years from the grant date. Stock options generally expire seven years from the date of grant.

In May 2015, stockholders approved an extension of the expiration date of the 2006 Stock Purchase Plan to August 2021. The 2006 Stock Purchase Plan allows eligible employees to purchase shares of our common stock at 85% of the value of our common stock on specific dates. Under the 2006 Stock Purchase Plan, 373 million shares of common stock are available for issuance through August 2021. As of December 26, 2015, 181.3 million shares of common stock were available for issuance under the 2006 Stock Purchase Plan.

Share-Based Compensation

Share-based compensation recognized in 2015 was $1.3 billion ($1.1 billion in 2014 and $1.1 billion in 2013).

On a quarterly basis, we assess changes to our estimate of expected equity award forfeitures based on our review of recent forfeiture activity and expected future employee turnover. We recognize the effect of adjustments made to the forfeiture rates, if any, in the period that we change the forfeiture estimate. The effect of forfeiture rate adjustments in all periods presented was not significant.

The total share-based compensation cost capitalized as part of inventory as of December 26, 2015 was $49 million ($39 million as of December 27, 2014 and $38 million as of December 28, 2013). During 2015, the tax benefit that we realized for the tax deduction from share-based awards totaled $533 million ($555 million in 2014 and $385 million in 2013).

We estimate the fair value of RSUs with time-based vesting using the value of our common stock on the date of grant, reduced by the present value of dividends expected to be paid on our shares of common stock prior to vesting. We estimate the fair value of OSUs using a Monte Carlo simulation model on the date of grant. We based the weighted average estimated value of RSU grants, as well as the weighted average assumptions that we used in calculating the fair value, on estimates at the date of grant, for each period as follows:



	Dec 26, 2015			Dec 27, 2014			Dec 28, 2013
Estimated values	$	31.63		$	25.40		$	21.45
Risk-free interest rate	0.6		%	0.5		%	0.2		%
Dividend yield	2.9		%	3.3		%	3.8		%
Volatility	27		%	23		%	25		%

We use the Black-Scholes option pricing model to estimate the fair value of options granted under the 2006 Plan and rights to acquire shares of common stock granted under the 2006 Stock Purchase Plan. No options were granted in 2015. We based the weighted average estimated value of employee stock option grants and rights granted under the stock purchase plan, as well as the weighted average assumptions used in calculating the fair value, on estimates at the date of grant, for each period as follows:



	Stock Options							Stock Purchase Plan
	Dec 26, 2015	Dec 27, 2014			Dec 28, 2013			Dec 26, 2015			Dec 27, 2014			Dec 28, 2013
Estimated values	n/a	$	3.61		$	3.11		$	6.56		$	5.87		$	4.52
Expected life (in years)	n/a	5.1			5.2			0.5			0.5			0.5
Risk-free interest rate	n/a	1.7		%	0.8		%	0.1		%	0.1		%	0.1		%
Dividend yield	n/a	3.6		%	3.9		%	3.1		%	3.2		%	4.0		%
Volatility	n/a	23		%	25		%	25		%	22		%	22		%

We base the expected volatility on implied volatility because we have determined that implied volatility is more reflective of market conditions and a better indicator of expected volatility than historical volatility. We use historical option exercise data as the basis for determining expected life, as we believe that historical data provides a reasonable basis upon which to estimate the expected life input for valuing options using the Black-Scholes model.

Restricted Stock Unit Awards

Restricted stock unit activity for each period was as follows:



	Number of RSUs (In Millions)		Weighted Average Grant-Date Fair Value
December 29, 2012	109.3		$	22.03
Granted	53.4		$	21.45
Vested	(44.5	)	$	20.21
Forfeited	(4.9	)	$	22.06
December 28, 2013	113.3		$	22.47
Granted	57.2		$	25.40
Vested	(42.5	)	$	22.33
Forfeited	(8.6	)	$	22.94
December 27, 2014	119.4		$	23.89
Granted	42.4		$	31.63
Vested	(46.6	)	$	23.61
Forfeited	(7.8	)	$	25.76
December 26, 2015	107.4		$	26.93
Expected to vest as of December 26, 2015	102.5		$	26.93

The aggregate fair value of awards that vested in 2015 was $1.5 billion ($1.1 billion in 2014 and $1.0 billion in 2013), which represents the market value of our common stock on the date that the RSUs vested. The grant-date fair value of awards that vested in 2015 was $1.1 billion ($949 million in 2014 and $899 million in 2013). The number of RSUs vested includes shares of common stock that we withheld on behalf of employees to satisfy the minimum statutory tax withholding requirements. RSUs that are expected to vest are net of estimated future forfeitures.

As of December 26, 2015, there was $1.8 billion in unrecognized compensation costs related to RSUs granted under our equity incentive plans. We expect to recognize those costs over a weighted average period of 1.2 years.

Stock Option Awards

As of December 26, 2015, options outstanding that have vested and are expected to vest were as follows:



	Number of Options (In Millions)	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (In Years)	Aggregate Intrinsic Value (In Millions)
Vested	43.8	$	21.07	1.8	$	609
Expected to vest	9.6	$	24.07	4.1	$	104
Total	53.4	$	21.61	2.2	$	713

Aggregate intrinsic value represents the difference between the exercise price and $34.98, the closing price of our common stock on December 24, 2015, as reported on The NASDAQ Global Select Market, for all in-the-money options outstanding. Options outstanding that are expected to vest are net of estimated future option forfeitures.

Options with a fair value of $42 million completed vesting in 2015 ($68 million in 2014 and $186 million in 2013). As of December 26, 2015, there was $13 million in unrecognized compensation costs related to stock options granted under our equity incentive plans. We expect to recognize those costs over a weighted average period of approximately eight months.

Stock option activity for each period was as follows:



	Number of Options (In Millions)		Weighted Average Exercise Price
December 29, 2012	202.8		$	20.20
Granted	20.1		$	22.99
Exercised	(65.0	)	$	18.76
Cancelled and forfeited	(3.0	)	$	22.58
Expired	(1.9	)	$	22.56
December 28, 2013	153.0		$	21.10
Granted	0.6		$	25.34
Exercised	(63.7	)	$	19.87
Cancelled and forfeited	(2.7	)	$	23.70
Expired	(9.9	)	$	27.00
December 27, 2014	77.3		$	21.30
Granted	—		$	—
Exercised	(21.9	)	$	20.34
Cancelled and forfeited	(1.1	)	$	23.23
Expired	(0.1	)	$	20.87
December 26, 2015	54.2		$	21.65
Options exercisable as of:
December 28, 2013	111.5		$	20.25
December 27, 2014	54.7		$	20.29
December 26, 2015	43.8		$	21.07

The aggregate intrinsic value of stock option exercises in 2015 was $284 million ($611 million in 2014 and $265 million in 2013), which represents the difference between the exercise price and the value of our common stock at the time of exercise. No stock options were granted during 2015.

As of December 26, 2015, outstanding options and exercisable options information, by range of exercise prices, was as follows:



					Outstanding Options				Exercisable Options
Range of Exercise Prices					Number of Shares (In Millions)	Weighted Average Remaining Contractual Life (In Years)	Weighted Average Exercise Price		Number of Shares (In Millions)	Weighted Average Exercise Price
$	1.82	-	$	15.00	0.4	2.9	$	11.70	0.4	$	11.70
$	15.01	-	$	20.00	21.7	0.8	$	18.48	21.7	$	18.48
$	20.01	-	$	25.00	24.7	3.1	$	22.92	16.9	$	22.86
$	25.01	-	$	27.42	7.4	3.3	$	27.15	4.8	$	27.23
Total					54.2	2.2	$	21.65	43.8	$	21.07

These options will expire if they are not exercised by specific dates through April 2021. Option exercise prices for options exercised during the three-year period ended December 26, 2015 ranged from $1.12 to $27.42.

Stock Purchase Plan

Approximately 77% of our employees were participating in our 2006 Stock Purchase Plan as of December 26, 2015 (76% in 2014 and 76% in 2013). Employees purchased 15.8 million shares of common stock in 2015 for $421 million under the 2006 Stock Purchase Plan (19.4 million shares of common stock for $393 million in 2014 and 20.5 million shares of common stock for $369 million in 2013). As of December 26, 2015, unrecognized share-based compensation costs related to rights to acquire shares of common stock under our stock purchase plan totaled $14 million. We expect to recognize those costs over a period of approximately two months.