
14.	Employee Benefit Plans


(a)	Employee Stock Incentive Plans

Stock Incentive Plan Program Description As of July 29, 2017, the Company had one stock incentive plan: the 2005 Stock Incentive Plan (the “2005 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. The Company’s primary stock incentive plan is summarized as follows:

2005 Plan As of July 29, 2017, the maximum number of shares issuable under the 2005 Plan over its term was 694 million shares, plus shares from certain previous plans 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. In addition, 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 from certain previous plans 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 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. The expiration date for stock options and stock appreciation rights 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. As of July 29, 2017, there are no outstanding stock options or stock appreciation rights under the 2005 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 July 29, 2017. 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 23 million, 25 million, and 27 million shares under the Purchase Plan in fiscal 2017, 2016, and 2015, respectively. As of July 29, 2017, 100 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):



Years Ended	July 29, 2017		July 30, 2016		July 25, 2015
Cost of sales—product	$	85	$	70	$	50
Cost of sales—service	134		142		157
Share-based compensation expense in cost of sales	219		212		207
Research and development	529		470		448
Sales and marketing	542		545		559
General and administrative	236		205		228
Restructuring and other charges	3		26		(2		)
Share-based compensation expense in operating expenses	1,310		1,246		1,233
Total share-based compensation expense	$	1,529	$	1,458	$	1,440
Income tax benefit for share-based compensation	$	451	$	429	$	373

As of July 29, 2017, the total compensation cost related to unvested share-based awards not yet recognized was $3.0 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):



Years Ended	July 29, 2017		July 30, 2016		July 25, 2015
Balance at beginning of fiscal year	242		276		310
Restricted stock, stock units, and other share-based awards granted	(76	)	(96	)	(101	)
Share-based awards canceled/forfeited/expired	78		30		40
Shares withheld for taxes and not issued	28		30		27
Other	—		2		—
Balance at end of fiscal year	272		242		276

For each share awarded as restricted stock or a restricted stock unit award under the 2005 Plan, 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	66		25.23
Assumed from acquisitions	1		24.85
Vested	(57	)	19.82		$	1,517
Canceled/forfeited/other	(16	)	19.67
UNVESTED BALANCE AT JULY 25, 2015	143		22.08
Granted	62		25.90
Assumed from acquisitions	6		24.58
Vested	(54	)	20.68		$	1,428
Canceled/forfeited/other	(12	)	22.91
UNVESTED BALANCE AT JULY 30, 2016	145		24.26
Granted	50		27.89
Assumed from acquisitions	15		32.21
Vested	(54	)	23.14		$	1,701
Canceled/forfeited/other	(15	)	23.56
UNVESTED BALANCE AT JULY 29, 2017	141		$	26.94


(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	18		5.17
Exercised	(32	)	19.22
Canceled/forfeited/expired	(16	)	30.01
BALANCE AT JULY 30, 2016	73		26.78
Assumed from acquisitions	8		4.47
Exercised	(14	)	12.11
Canceled/forfeited/expired	(55	)	31.83
BALANCE AT JULY 29, 2017	12		$	6.15

The total pretax intrinsic value of stock options exercised during fiscal 2017, 2016, and 2015 was $283 million, $266 million, and $434 million, respectively.

The following table summarizes significant ranges of outstanding and exercisable stock options as of July 29, 2017 (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	12	6.3	$	6.15	$	307	6	$	5.61	$	163

The aggregate intrinsic value represents the total pretax intrinsic value, based on Cisco's closing stock price of $31.52 as of July 28, 2017, 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 July 29, 2017 was 6 million. As of July 30, 2016, 64 million outstanding stock options were exercisable, and the weighted-average exercise price was $29.66.


(g)	Valuation of Employee Share-Based Awards

Time-based restricted stock units and 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
Years Ended	July 29, 2017			July 30, 2016			July 25, 2015
Number of shares granted (in millions)	43			57			55
Grant date fair value per share	$	28.38		$	26.01		$	25.30
Weighted-average assumptions/inputs:
Expected dividend yield	3.5		%	3.2		%	2.9		%
Range of risk-free interest rates	0.0% – 1.5%			0.0% – 1.2%			0.0% – 1.8%



	PERFORMANCE BASED RESTRICTED STOCK UNITS
Years Ended	July 29, 2017			July 30, 2016			July 25, 2015
Number of shares granted (in millions)	7			5			11
Grant date fair value per share	$	28.94		$	24.70		$	24.85
Weighted-average assumptions/inputs:
Expected dividend yield	3.4		%	3.1		%	3.0		%
Range of risk-free interest rates	0.1% – 1.5%			0.0% – 1.2%			0.0% – 1.8%
Range of expected volatilities for index	16.7% – 46.8%			15.3% – 54.3%			14.3% – 70.0%

The PRSUs granted during the fiscal years 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.

The assumptions for the valuation of employee stock purchase rights are summarized as follows:



	EMPLOYEE STOCK PURCHASE RIGHTS
Years Ended	July 29, 2017			July 30, 2016			July 25, 2015
Weighted-average assumptions:
Expected volatility	24.6		%	23.9		%	26.0		%
Risk-free interest rate	0.7		%	0.4		%	0.3		%
Expected dividend	3.2		%	3.1		%	2.8		%
Expected life (in years)	1.3			1.3			1.8
Weighted-average estimated grant date fair value per share	$	6.52		$	5.73		$	6.54

The valuation of employee stock purchase rights and the related assumptions are for the employee stock purchases made during the respective fiscal years.

The Company used third-party analyses to assist in developing the assumptions used in, as well as calibrating, its lattice-binomial and Black-Scholes models. The Company is responsible for determining the assumptions used in estimating the fair value of its share-based payment awards.

The Company used the implied volatility for traded options (with contract terms corresponding to the expected life of the employee stock purchase rights) on the Company’s stock as the expected volatility assumption required in the Black-Scholes model. The implied volatility is more representative of future stock price trends than historical volatility. The risk-free interest rate assumption is based upon observed interest rates appropriate for the term of the Company’s employee stock purchase rights. The dividend yield assumption is based on the history and expectation of dividend payouts at the grant date.


(h)	Employee 401(k) Plans

The Company sponsors the Cisco Systems, Inc. 401(k) Plan (the “Plan”) to provide retirement benefits for its employees. As allowed under Section 401(k) of the Internal Revenue Code, the Plan provides for tax-deferred salary contributions and after-tax contributions for eligible employees. The Plan allows employees to contribute up to 75% of their annual eligible earnings to the Plan on a pretax and after-tax basis, including Roth contributions. Employee contributions are limited to a maximum annual amount as set periodically by the Internal Revenue Code. The Company matches pretax and Roth employee contributions up to 100% of the first 4.5% of eligible earnings that are contributed by employees. Therefore, the maximum matching contribution that the Company may allocate to each participant’s account will not exceed $12,150 for the 2017 calendar year due to the $270,000 annual limit on eligible earnings imposed by the Internal Revenue Code. All matching contributions vest immediately. The Company’s matching contributions to the Plan totaled $265 million, $262 million, and $244 million in fiscal 2017, 2016, and 2015, respectively.

The Plan allows employees who meet the age requirements and reach the Plan contribution limits to make catch-up contributions (pretax or Roth) not to exceed the lesser of 75% of their annual eligible earnings or the limit set forth in the Internal Revenue Code. Catch-up contributions are not eligible for matching contributions. In addition, the Plan provides for discretionary profit-sharing contributions as determined by the Board of Directors. Such contributions to the Plan are allocated among eligible participants in the proportion of their salaries to the total salaries of all participants. There were no discretionary profit-sharing contributions made in fiscal 2017, 2016, and 2015.

The Company also sponsors other 401(k) plans as a result of acquisitions of other companies. The Company’s contributions to these plans were not material to the Company on either an individual or aggregate basis for any of the fiscal years presented.


(i)	Deferred Compensation Plans

The Cisco Systems, Inc. Deferred Compensation Plan (the “Deferred Compensation Plan”), a nonqualified deferred compensation plan, became effective in 2007. As required by applicable law, participation in the Deferred Compensation Plan is limited to a select group of the Company’s management employees. Under the Deferred Compensation Plan, which is an unfunded and unsecured deferred compensation arrangement, a participant may elect to defer base salary, bonus, and/or commissions, pursuant to such rules as may be established by the Company, up to the maximum percentages for each deferral election as described in the plan. The Company may also, at its discretion, make a matching contribution to the employee under the Deferred Compensation Plan. A matching contribution equal to 4.5% of eligible compensation in excess of the Internal Revenue Code limit for qualified plans for calendar year 2017 that is deferred by participants under the Deferred Compensation Plan (with a $1.5 million cap on eligible compensation) will be made to eligible participants’ accounts at the end of calendar year 2017. The total deferred compensation liability under the Deferred Compensation Plan, together with deferred compensation plans assumed from acquired companies, was approximately $622 million and $569 million as of July 29, 2017 and July 30, 2016, respectively, and was recorded primarily in other long-term liabilities.