
14.	Employee Benefit Plans


(a)	Employee Stock Incentive Plans

Stock Incentive Plan Program Description As of January 23, 2016, the Company had three stock incentive plans: the 2005 Stock Incentive Plan (the “2005 Plan”); the Cisco Systems, Inc. SA Acquisition Long-Term Incentive Plan (the “SA Acquisition Plan”); and the Cisco Systems, Inc. WebEx Acquisition Long-Term Incentive Plan (the “WebEx Acquisition Plan”). In addition, the Company has, in connection with the acquisitions of various companies, assumed the share-based awards granted under stock incentive plans of the acquired companies or issued share-based awards in replacement thereof. Share-based awards are designed to reward employees for their long-term contributions to the Company and provide incentives for them to remain with the Company. The number and frequency of share-based awards are based on competitive practices, operating results of the Company, government regulations, and other factors. Since the inception of the stock incentive plans, the Company has granted share-based awards to a significant percentage of its employees, and the majority has been granted to employees below the vice president level. The Company’s primary stock incentive plans are summarized as follows:

2005 Plan As of January 23, 2016, the maximum number of shares issuable under the 2005 Plan over its term was 694 million shares, plus the 1996 Stock Incentive Plan, the SA Acquisition Plan, and the WebEx Acquisition Plan that are forfeited or are terminated for any other reason before being exercised or settled. If any awards granted under the 2005 Plan are forfeited or are terminated for any other reason before being exercised or settled, the unexercised or unsettled shares underlying the awards will again be available under the 2005 Plan. Starting November 19, 2013, shares withheld by the Company from an award other than a stock option or stock appreciation right to satisfy withholding tax liabilities resulting from such award will again be available for issuance, based on the fungible share ratio in effect on the date of grant.

Pursuant to an amendment approved by the Company’s shareholders on November 12, 2009, the number of shares available for issuance under the 2005 Plan is reduced by 1.5 shares for each share awarded as a stock grant or a stock unit, and any shares underlying awards outstanding under the 1996 Stock Incentive Plan, the SA Acquisition Plan, and the WebEx Acquisition Plan that expire unexercised at the end of their maximum terms become available for reissuance under the 2005 Plan. The 2005 Plan permits the granting of stock options, restricted stock, and restricted stock units ("RSUs"), the vesting of which may be performance-based or market-based along with the requisite service requirement, and stock appreciation rights to employees (including employee directors and officers), consultants of the Company and its subsidiaries and affiliates, and non-employee directors of the Company. Stock options and stock appreciation rights granted under the 2005 Plan have an exercise price of at least 100% of the fair market value of the underlying stock on the grant date and prior to November 12, 2009 have an expiration date no later than nine years from the grant date. The expiration date for stock options and stock appreciation rights granted subsequent to the amendment approved on November 12, 2009 shall be no later than 10 years from the grant date.

The stock options will generally become exercisable for 20% or 25% of the option shares one year from the date of grant and then ratably over the following 48 months or 36 months, respectively. Time-based stock grants and time-based RSUs will generally vest with respect to 20% or 25% of the shares or share units covered by the grant annually over the vesting period. The majority of the performance-based and market-based RSUs vests at the end of the three-year requisite service period or earlier if the award recipient meets certain retirement eligibility conditions. Certain performance-based RSUs, that are based on the achievement of financial and/or non-financial operating goals, typically vest upon the achievement of milestones (and may require subsequent service periods), with overall vesting of the shares underlying the award ranging from six months to three years. The Compensation and Management Development Committee of the Board of Directors has the discretion to use different vesting schedules. Stock appreciation rights may be awarded in combination with stock options or stock grants, and such awards shall provide that the stock appreciation rights will not be exercisable unless the related stock options or stock grants are forfeited. Stock grants may be awarded in combination with non-statutory stock options, and such awards may provide that the stock grants will be forfeited in the event that the related non-statutory stock options are exercised.

Acquisition Plans In connection with the Company’s acquisitions of Scientific-Atlanta, Inc. (“Scientific-Atlanta”) and WebEx Communications, Inc. (“WebEx”), the Company adopted the SA Acquisition Plan and the WebEx Acquisition Plan, respectively, each effective upon completion of the applicable acquisition. These plans constitute assumptions, amendments, restatements, and renamings of the 2003 Long-Term Incentive Plan of Scientific-Atlanta and the WebEx Communications, Inc. Amended and Restated 2000 Stock Incentive Plan, respectively. The plans permit the grant of stock options, stock, stock units, and stock appreciation rights to certain employees of the Company and its subsidiaries and affiliates who had been employed by Scientific-Atlanta or its subsidiaries or WebEx or its subsidiaries, as applicable. As a result of the shareholder approval of the amendment and extension of the 2005 Plan, as of November 15, 2007, the Company will no longer make stock option grants or direct share issuances under either the SA Acquisition Plan or the WebEx Acquisition Plan.


(b)	Employee Stock Purchase Plan

The Company has an Employee Stock Purchase Plan, which includes its subplan named the International Employee Stock Purchase Plan (together, the “Purchase Plan”), under which 621 million shares of the Company’s common stock have been reserved for issuance as of January 23, 2016. Eligible employees are offered shares through a 24-month offering period, which consists of four consecutive 6-month purchase periods. Employees may purchase a limited number of shares of the Company’s stock at a discount of up to 15% of the lesser of the market value at the beginning of the offering period or the end of each 6-month purchase period. The Purchase Plan is scheduled to terminate on January 3, 2020. The Company issued 14 million shares under the Purchase Plan during each of the six months ended January 23, 2016 and January 24, 2015. As of January 23, 2016, 134 million shares were available for issuance under the Purchase Plan.


(c)	Summary of Share-Based Compensation Expense

Share-based compensation expense consists primarily of expenses for stock options, stock purchase rights, restricted stock, and restricted stock units granted to employees. The following table summarizes share-based compensation expense (in millions):



	Three Months Ended					Six Months Ended
	January 23, 2016			January 24, 2015		January 23, 2016		January 24, 2015
Cost of sales—product	$	16		$	11	$	29	$	22
Cost of sales—service	35			34		73		71
Share-based compensation expense in cost of sales	51			45		102		93
Research and development	107			105		221		224
Sales and marketing	126			114		265		261
General and administrative	47			42		104		101
Restructuring and other charges	(1		)	2		14		(2		)
Share-based compensation expense in operating expenses	279			263		604		584
Total share-based compensation expense	$	330		$	308	$	706	$	677
Income tax benefit for share-based compensation	$	103		$	85	$	198	$	179

As of January 23, 2016, the total compensation cost related to unvested share-based awards not yet recognized was $2.9 billion, which is expected to be recognized over approximately 2.6 years on a weighted-average basis.


(d)	Share-Based Awards Available for Grant

A summary of share-based awards available for grant is as follows (in millions):



	Share-Based Awards Available for Grant
BALANCE AT JULY 26, 2014	310
Restricted stock, stock units, and other share-based awards granted	(101	)
Share-based awards canceled/forfeited/expired	40
Shares withheld for taxes and not issued	27
BALANCE AT JULY 25, 2015	276
Restricted stock, stock units, and other share-based awards granted	(64	)
Share-based awards canceled/forfeited/expired	18
Shares withheld for taxes and not issued	23
Other	2
BALANCE AT JANUARY 23, 2016	255

As reflected in the preceding table, for each share awarded as restricted stock or subject to a restricted stock unit award under the 2005 Plan, an equivalent of 1.5 shares was deducted from the available share-based award balance. For restricted stock units that were awarded with vesting contingent upon the achievement of future financial performance or market-based metrics, the maximum awards that can be achieved upon full vesting of such awards were reflected in the preceding table.


(e)	Restricted Stock and Stock Unit Awards

A summary of the restricted stock and stock unit activity, which includes time-based and performance-based or market-based restricted stock units, is as follows (in millions, except per-share amounts):



	Restricted Stock/ Stock Units		Weighted-Average Grant Date Fair Value per Share		Aggregate Fair Value
UNVESTED BALANCE AT JULY 26, 2014	149		$	19.54
Granted and assumed	67		25.29
Vested	(57	)	19.82		$	1,517
Canceled/forfeited	(16	)	20.17
UNVESTED BALANCE AT JULY 25, 2015	143		22.08
Granted and assumed	43		24.80
Vested	(40	)	20.24		$	1,050
Canceled/forfeited	(9	)	22.57
UNVESTED BALANCE AT JANUARY 23, 2016	137		$	23.45


(f)	Stock Option Awards

A summary of the stock option activity is as follows (in millions, except per-share amounts):



	STOCK OPTIONS OUTSTANDING
	Number Outstanding		Weighted-Average Exercise Price per Share
BALANCE AT JULY 26, 2014	187		$	26.03
Assumed from acquisitions	1		2.60
Exercised	(71	)	21.15
Canceled/forfeited/expired	(14	)	29.68
BALANCE AT JULY 25, 2015	103		28.68
Assumed from acquisitions	5		2.07
Exercised	(20	)	21.63
Canceled/forfeited/expired	(10	)	29.00
BALANCE AT JANUARY 23, 2016	78		$	28.75

The following table summarizes significant ranges of outstanding and exercisable stock options as of January 23, 2016 (in millions, except years and share prices):



	STOCK OPTIONS OUTSTANDING						STOCK OPTIONS EXERCISABLE
Range of Exercise Prices	Number Outstanding	Weighted- Average Remaining Contractual Life (in Years)	Weighted- Average Exercise Price per Share		Aggregate Intrinsic Value		Number Exercisable	Weighted- Average Exercise Price per Share		Aggregate Intrinsic Value
$ 0.01 – 20.00	7	6.2	$	3.32	$	135	4	$	4.01	$	70
$ 20.01 – 25.00	2	0.9	23.02		1		2	23.02		1
$ 25.01 – 30.00	10	0.7	26.82		—		10	26.82		—
$ 30.01 – 35.00	59	0.6	32.16		—		59	32.16		—
Total	78	1.1	$	28.75	$	136	75	$	29.83	$	71

The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on the Company’s closing stock price of $23.37 as of January 22, 2016, that would have been received by the option holders had those option holders exercised their stock options as of that date. The total number of in-the-money stock options exercisable as of January 23, 2016 was 4 million. As of July 25, 2015, 102 million outstanding stock options were exercisable and the weighted-average exercise price was $29.02.


(g)	Valuation of Employee Share-Based Awards

Time-based restricted stock units and performance-based restricted stock units ("PRSUs") that are based on the Company’s financial performance metrics or non-financial operating goals are valued using the market value of the Company’s common stock on the date of grant, discounted for the present value of expected dividends. On the date of grant, the Company estimated the fair value of the total shareholder return (TSR) component of the PRSUs using a Monte Carlo simulation model. The assumptions for the valuation of time-based RSUs and PRSUs are summarized as follows:



	RESTRICTED STOCK UNITS						PERFORMANCE RESTRICTED STOCK UNITS
Three Months Ended	January 23, 2016			January 24, 2015			January 23, 2016			January 24, 2015
Number of shares granted (in millions)	27			1			1			1
Grant date fair value per share	$	25.25		$	25.07		$	25.32		$	25.39
Weighted-average assumptions/inputs:
Expected dividend yield	3.1		%	2.8		%	3.1		%	2.8		%
Range of risk-free interest rates	0.1% – 1.2%			0.0% – 1.6%			0.0% – 1.2%			0.0% – 1.6%
Range of expected volatilities for index	N/A			N/A			15.3% – 54.3%			14.4% – 63.7%



	RESTRICTED STOCK UNITS						PERFORMANCE RESTRICTED STOCK UNITS
Six Months Ended	January 23, 2016			January 24, 2015			January 23, 2016			January 24, 2015
Number of shares granted (in millions)	36			11			5			7
Grant date fair value per share	$	24.93		$	23.34		$	24.71		$	23.70
Weighted-average assumptions/inputs:
Expected dividend yield	3.1		%	3.0		%	3.2		%	3.0		%
Range of risk-free interest rates	0.0% – 1.2%			0.0% – 1.8%			0.0% – 1.2%			0.0% – 1.8%
Range of expected volatilities for index	N/A			N/A			15.3% – 54.3%			14.4% – 70.0%

The PRSUs granted during the periods presented are contingent on the achievement of the Company’s financial performance metrics, its comparative market-based returns, or the achievement of financial and non-financial operating goals. For the awards based on financial performance metrics or comparative market-based returns, generally 50% of the PRSUs are earned based on the average of annual operating cash flow and earnings per share goals established at the beginning of each fiscal year over a three-year performance period. Generally, the remaining 50% of the PRSUs are earned based on the Company’s TSR measured against the benchmark TSR of a peer group over the same period. Each PRSU recipient could vest in 0% to 150% of the target shares granted contingent on the achievement of the Company's financial performance metrics or its comparative market-based returns and 0% to 100% of the target shares granted contingent on the achievement of non-financial operating goals.